MASTER 

NEGATIVE 
NO.  94-821 40 


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Author: 


U.S.  Internal  Revenue 
Service 

Title: 

Income  tax  primer 


Place: 


Washington,  D.C 

Date: 

1918 


^H-^a\^lV^ 


MASTER    NEGATIVE   # 


COLUMBIA  UNIVERSITY  LIBRARIES 
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Internal  Revenue  Service. 
U.  S.     Office  of  internal  rovcnuo, 

...  Income  tax  primer,  prepared  by  the  Bureau  of  in- 
ternal revenue  for  the  information  and  assistance  of  tax- 
payers.    Washington,  Govt,  print,  off.,  1918. 

45  p.    23"*\     (65th  Cong.,  2d  sess.    House.    Doc.  841) 

At  head  of  title :  Treasury  department.    United  States  internal  revenue. 


1.  Income  tax— U.  S.— Law.        i.  Title. 


Library  of  Congress 
Copy  2. 


IIJ46S2.A4    1918 


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HOUSE  OP  REPRESENTATIVES 


j  DOCUMEK 

t    No.  841 


TREASURY  DEPARTNffiNT 
\JJNITED  STATES  INTERNAL  REVENUE 


X  • 


INCOME  TAX  PRIMER 


PREPARED  BY  THE  BUREAU  OF 

INTERNAL  REVENUE  FOR  THE  INFORMATION 

AND  ASSISTANCE  OF  TAXPAYERS 


WASHINGTON 

GOVERNMENT  PRINTING  OFFICE 
1918 


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Im  the  Housb  ojr  Repeeskntatives, 

January  19, 1918, 

Ordered^  That  38,910  copies  of  the  Income  Tax  Primer,  prepared 
by  the  Bureau  of  Internal  Revenue  for  the  information  and  assist- 
ance of  taxpayers,  be  printed  for  the  use  of  the  House  of  Representa- 
tives and  distributed  through  the  folding  room. 

2 


INCOME  TAX  PRIMER.' 


RETURNS. 


1.  Am  I  required  to  render  a  personal  income-tax  return 
for  the  year  1917P 

Yes;  if  unmarried  and  your  net  income  for  that  year  equals  or 
exceeds  $1,000.  If  you  are  married  no  return  is  required  unless  your 
net  income,  including  that  of  your  husband  or  wife  and  dependent 
children,  equals  or  exceeds  $2^00. 

If  you  act  as  the  guardian  of  a  minor  or  incompetent  person,  or  as 
the  administrator,  executor,  or  trustee  of  an  estate  or  trust,  a  return 
will  be  required  of  you  for  and  in  behalf  of  your  ward,  or  the  estate 
or  trust  for  which  you  act,  if  the  conditions  outlined  under  the  head 
of  "  Fiduciaries,"  as  requiring  a  return,  are  present  in  your  case. 

2.  Where  should  my  personal  return  for  the  year  1917  be 
flledP 

Section  8  {a)  of  the  act  of  September  8,  1916,  provides  that  your 
return  may  be  filed  with  the  collector  of  internal  revenue  for  the 
district  in  which  you  have  your  legal  residence  or  principal  place  of 
business.  If  your  legal  residence  is  located  in  one  collection  district 
and  your  principal  place  of  business  in  another,  it  is  optional  with 
which  collector  your  return  shaU  be  filed;  but  for  administrative 
reasons  the  Conunissioner  of  Internal  Revenue  desires  that  it  be 
filed  with  the  collector  of  the  district  in  which  your  legal  residence 
is  located. 

3.  When  may  my  1917  return  be  filed  with  a  collector  ol 
internal  revenue? 

On  any  day  after  December  31,  1917,  but  not  later  than  March  1, 
1918. 

4.  Will  failure  to  file  my  return  within  the  time  prescribed 
by  law  render  me  liable  to  any  penalty? 

Yes.  Under  the  provisions  of  section  18  of  the  act  of  Septem- 
ber 8,  1916,  as  amended,  you  will  be  liable  to  a  specific  penalty  of 
not  less  than  $20  nor  more  than  $1,000  if  you  fail  to  have  your  1917 
return  in  the  office  of  the  collector  of  internal  revenue  for  your  dis- 
trict before  the  close  of  business  on  March  1,  1918;  and,  under  the 
provisions  of  section  3176,  Revised  Statutes,  you  will  also  be  liable 
to  50  per  c-ent  additional  tax. 

Therefore,  you  should  use  extreme  care  to  see  that  your  return  is 
placed  in  the  mails  in  ample  time  to  reach  the  office  of  your  collector 
Defore  the  close  of  business  March  1,  1918. 

*  Information  not  afforded  by  this  Primer  may  be  obtained  by  making  appli- 
cation to  collectors  of  internal  revenue. 

8 


/ 


INCOME  TAX  PBIMEB. 


\ 


5.  May  an  extension  of  time  beyond  March  1,  1913,  be 
obtained  for  the  filing  of  my  1917  return? 

Yes.  If,  on  account  of  illness  or  absence  from  home,  you  are 
unable  to  render  your  return  within  the  time  prescribed  by  law,  you 
may  obtain  an  extension  of  30  days  if  a  request  therefor  is  filed  witl 
the  collector  of  your  district  before  the  due  date  of  the  return.  (See 
sec.  3176,  R.  S.)  In  this  request  you  must  state  the  reason  why  the 
return  can  not  be  filed  within  the  time  prescribed  by  law. 

Collectors  of  internal  revenue  are  not  authorized  to  grant  exten- 
sions of  more  than  30  days,  but  the  Commissioner  of  Internal  Rev- 
enue has  authority  under  the  provisions  of  section  14  (c)  of  the  act 
of  September  8, 1916,  to  grant  a  reasonable  extension  beyond  30  days 
in  meritorious  cases.  If  you  desire  an  extension  of  more  than  30 
days,  your  request  should  be  addressed  to  the  commissioner  and 
should  contain  a  detailed  statement  covering  the  reasons  which  make 
it  impossible  for  you  to  file  your  return  on  or  before  March  1. 

6.  Would  a  personal  return  rendered  by  an  agent,  for  and 
in  my  behalf,  be  accepted? 

If  by  reason  of  illness,  absence,  or  nonresidence  a  taxpayer  is 
imable  personally  to  render  his  return,  he  may  appoint  an  agent  to 
act  for  him,  and  the  return  executed  by  the  agent  will  be  accepted  if 
he  makes  affidavit  that  he  has  sufficient  knowledge  to  make  a  com- 
plete and  accurate  return  for  his  principal  and  assumes  responsibility 
tor  making  the  return  and  incurring  the  penalties  provided  for  a 
delinquent,  erroneous,  false,  or  fraudulent  return. 

7.  What  would  happen  should  a  taxpayer  render  a  false  or 
fraudulent  return  with  intent  to  evade  a  proper  pajrment  of 
income  taxP 

Under  the  provisions  of  section  3176,  Revised  Statutes,  he  would 
become  liable  to  an  additional  tax  of  100  per  cent,  and  under  the  pro- 
visions of  section  18  of  the  act  of  September  8,  1916,  as  amendea,  to 
a  fine  of  not  to  exceed  $2,000,  or  to  one  year's  imprisonment,  or  both, 
in  the  discretion  of  the  court,  and  to  the  costs  of  prosecution. 

8.  May  a  husband  and  wife,  living  together,  and  each  re- 
ceiving an  independent  income,  render  separate  returns? 

Yes.  If  the  husband  and  wife  each  receive  an  independent  income 
equal  to  or  in  excess  of  $1,000,  separate  returns  may  be  rendered.  If 
however,  the  income  of  either  is  less  than  $1,000,  but  their  combinea 
income  equals  or  exceeds  $2,000,  a  joint  return  should  be  rendered. 

Where  husband^  and  wife  file  separate  returns,  one  of  them  beinc 
filed  within  the  time  prescribed  by  law,  the  other  delinquent,  such 
returns  are  not  held  to  be  supplemental  to  each  other,  and  delin- 
quency must  be  answered  for  by  the  one  in  connection  with  whose 
return  it  occurred. 

9.  If  a  husband  and  wife  render  a  joint  return,  is  the  addi- 
tional tax  assessed  against  that  return  based  upon  the  aggre- 
gate amount  of  income  shown? 

No.  The  normal  income  tax  will  be  assessed  against  the  aggregate 
amount  reported  by  the  husband  and  wife  whether  joint  or  separate 
returns  are  rendered,  but  the  additional  income  taxes  are  oiuy  as- 
sessed against  the  separate  income  of  each. 


)i    t 


INCOME  TAX  PRIMEB.  O 

10.  Is  a  married  man  entitled  to  a  personal  exemption  of 
f  2,000,  and  $400  additional  exemption  on  account  of  two 
de|>endent  children,  whose  total  net  income  does  not  exceed 
$2,400,  but  does  equal  or  exceed  $2,000,  required  to  render 
a  return? 

Yes.  While  he  will  not  be  required  to  pay  an  income  tax,  he  is  re- 
quired to  render  a  return  if  his  net  income  equals  or  exceeds  $2,000. 

1 1.  I  act  as  agent  for  a  nonresident  alien  individual.  What 
responsibilities  are  imposed  upon  me  by  the  income-tax  law? 

As  the  agent  of  a  nonresident  alien  individual,  you  are  responsible 
for  correct  returns  of  all  income  accruing  to  your  principal  within 
the  purview  of  the  agency,  and  for  payment  of  any  and  all  taxes 
assessed  against  that  return. 

12.  If  an  individual  engaged  in  business  takes  an  inven- 
tory and  closes  his  books  on  any  day  during  a  calendar  year, 
can  he  render  his  personal  income  tax  return  on  the  basis  of 
that  fiscal  year? 

No.  A  personal-income  tax  return  can  not  be  rendered  for  any 
other  period  than  a  full  calendar  year. 

13.  Where  can  I  get  the  blank  form  upon  which  to  render 
my  return? 

From  the  collector  of  internal  revenue  for  your  district.  The 
collector  will  endeavor  to  have  such  forms  sent  to  you,  but  failure 
to  receive  one  will  not  excuse  you  from  making  a  return.  If  you  do 
not  receive  one,  it  is  your  duty  to  request  the  collector  to  furnish 
you  with  a  copy. 

RATE  OF  TAX. 

14.  What  personal  income  taxes  are  imposed  upon  income 
received  during  the  calendar  year  1917? 

In  computing  income  tax  liability  for  the  year  1917  the  normal 
and  additional  income  taxes  imposed  by  the  act  of  September  8, 
1916,  and  also  the  act  of  October  3, 1917,  are  to  be  considered. 

Under  section  1(a)  of  the  former  act  a  normal  income  tax  of  2  per 
cent  is  imposed  upon  so  much  of  an  individual's  net  income,  exclu- 
sive of  that  derived  from  dividends  on  the  capital  stock,  or  from  the 
net  earnings  of  corporations,  joint-stock  companies,  etc.,  subject  to 
like  tax,  as  exceeds  the  amount  of  personal  exemption  to  which  he  is 
entitled  under  section  7;  and  so  much  of  his  total  net  income,  in- 
cluding that  derived  from  individuals  and  net  earnings  of  corpora- 
tions, as  exceeds  $20,000  is  subject  to  the  additional  income  tax  at 
the  graduated  rates  prescribed  by  section  1(b). 

Under  section  1  oi  the  act  of  Oetober  3,  1917,  so  much  of  the  indi- 
vidual's net  income^  exclusive  of  dividends,  etc.,  as  exceeds  the  amount 
of  personal  exemption  allowed  by  section  3  is  subject  to  an  additional 
normal  tax  of  2  per  cent,  and  that  portion  of  his  total  net  income, 
including  dividends,  as  exceeds  $5,000  is  subject  to  the  additional  in- 
come tax  at  the  graduated  rates  specified  in  section  2,  act  of  October 
3, 1917. 


/ 


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6 


orooMB  TAT  BsnaoL 

EXEMPTION. 


1 5.  What  amount  of  i>ersoiial  exemption  is  allowed  by  each 
of  the  two  actsP 

Section  7  of  the  act  of  September  8, 1916,  allows  a  pccsonaJ  exemp- 
tion of  $3,000  to  unmarned  persons,  plus  $1,000  additional  if  the  per- 
son making  the  return  be  the  head  of  a  family  or  a  married  man  wi^  a 
wife  hvmg  with  him.  This  additional  exemption  of  $1,000  is  allowed 
if  the  person  making  the  return  is  a  married  woman  with  a  husband 
hving  with  her,  but  in  no  event  shall  this  additional  $1,000  be  de- 
ducted by  both  husband  and  wife. 

The  exemptions  allowed  by  section  3  of  the  act  of  October  8, 1917, 
are  the  same  as  under  the  act  of  September  8,  1916,  except  that  the 
exemptions  of  $3,000  and  $4,000  allowed  by  the  1916  act  are,  re- 
spectively, $1,000  and  $2,000. 

In  addition,  a  further  exemption  of  $200  is  allowed  for  each  de- 
pendent child  under  18  years  of  age,  or  over  that  age  if  incapable  of 
self-support  because  mentally  or  physically  defective,  and  this  ia 
allowed  in  computing  normal  tax  liability  under  both  acts. 

16.  May  a  widower  or  widow  whose  wife  or  husband  died 
during  the  latter  part  of  the  tax  year,  say,  December  26,  claim 
the  full  amount  of  personal  exemption  allowed  to  a  married 
person? 

No.  The  marital  status  of  the  person  rendering  the  return  as  of 
December  31  of  the  tax  year  determines  the  amount  of  exempti<m 
which  may  be  claimed. 

17.  What  is  meant  by  the  term  "  Head  of  a  family  ^*P 
Treasury  Decision  2427  states  that  a  "  head  of  a  family  "  is  held  to 

be  a  person  who  actually  supports  and  maintains  one  or  more  in- 
dividuals who  are  closely  connected  with  him  by  blood  relationship, 
relationship  by  marriage  or  by  adoption,  and  whose  right  to  exercise 
family  control  and  provide  for  these  dependent  individuals  is  based 
upon  some  moral  or  legal  obligation. 

INCOME.  GROSS  AND  NET. 

18.  What  income,  if  any,  is  exempt? 

(a)  The  proceeds  of  life  insurance  policies  paid  to  individuil 
beneficiaries  upon  the  death  of  the  insured. 

(b)  The  amount  received  by  the  insured,  as  a  return  of  premium  or 
premiums  paid  by  him  under  life  insurance,  endowment,  or  annuity 
contracts,  either  during  the  term  or  at  the  maturity  or  surrender,  of 
the  insurance  contract. 

(c)  The  value  of  property  acquired  by  gift,  bequest,  devise,  or 
descent.  It  must  be  understood,  however,  diat  the  income  derived 
from  such  property  is  taxable. 

(d)  Interest  upon  the  obligations  of  a  State,  or  any  political  sub- 
division of  a  State,  or  upon  the  obligations  of  the  United  Stat>es,  ex- 
cept in  the  case  of  obligations  of  the  United  States  issued  after  Sep- 
teniber  1,  1917,  only  to  the  extent  provided  in  the  act  authorizinii 
their  issue.  ^* 


•%■    ^ 


INCOME  TAX  PBIMEB.  7 

(tf)  Interest  upon  the  obligations  of  any  possession  of  the  United 
States,  or  securities  issued  under  the  provisions  of  the  Federal  farm- 
loan  act  of  July  17, 1917. 

(/)  The  compensation  of  the  present  President  of  the  United 
States  during  the  term  for  which  he  has  been  elected,  and  the  judges 
of  the  Supreme  and  inferior  courts  of  the  United  States  in  office  on 
October  3,  1917. 

(g)  The  compensation  of  all  officers  and  employees  of  a  State  or 
any  political  subdivision  of  a  State,  except  when  such  compensation 
is  paid  by  the  United  States  Government.  This  includes  the  official 
salaries  received  by  public-school  teachers.  State  and  county  officers, 
and  employees  of  municipalities;  but  income  derived  by  such  persons 
from  sources  other  than  State,  county,  or  municipal  funds,  and  the 
other  sources  enumerated  in  this  answer,  is  taxable.  (See  sec.  4,  ac£ 
of  Sept.  8, 1916,  as  amended.) 

INCOME. 

19.  What  is  meant  by  the  term  "  Net  income  ''  P 

For  the  purpose  of  determining  whether  or  not  a  personal  income 
tax  return  should  be  rendered,  net  income  means  your  total  gross 
income  less  the  exemptions  specified  in  the  answer  to  the  eighteenth 
question  and  the  general  deductions  specified  in  the  answer  to  the 
fifty-eighth  question. 

20.  In  rendering  a  return  what  items  of  income  must  I 
report  under  gross  income? 

Under  gross  income  should  be  reported  every  item  of  income  de- 
rived from  anv  source  whatever  (except  those  specified  in  the  answer 
to  question  18)  actually  received  during  the  calendar  year  for  which 
the  return  is  rendered,  whether  received  in  cash  or  the  equivalent  of 
cash,  including: 

(a)  All  amounts  of  salary,  wages,  commissions,  or  compensation 
of  whatever  kind,  received  for  personal  service,  including  profes- 
sional fees. 

(h)  All  amounts  of  gain,  profit,  or  income  derived  from  a  business, 
trade,  commerce,  or  from  any  sale  of  property,  real,  personal,  or 
mixed.  The  method  of  ascertaining  the  amount  of  gam  or  profit 
derived  from  a  sale  is  outlined  in  the  answer  to  question  26. 

(c)  Rents,  interest  on  notes,  mortgages,  deeds  of  trust,  or  other 
securities  issued  by  individuals,  partnerships,  etc.,  interest  on  bonds, 
mortgages,  deeds  of  trust,  or  other  similar  obligations  of  corporations, 
joint- stock  companies,  associations,  or  insurance  companies,  and  in- 
terest on  bank  deposits. 

{d)  All  income  received  from  fiduciaries — ^that  is,  amounts  re^ 
ceived  from  incomes  of  estates,  trusts,  etc.,  through  trustees,  admin- 
istrators, or  executors. 

(e)  Ii  you  have  an  interest  in  a  partnership  you  should  report 
your  distributive  share  of  the  earnings  or  profits  of  the  partnership 
ascertained  during  the  calendar  year  for  which  the  return  is  ren- 
dered, whether  distributed  to  you  or  not;  that  is,  if  the  fiscal  year 
of  the  partnership  ends  on  December  31  of  that  year  your  distribu- 
tive share  of  its  earnings  or  profits  ascertained  upon  the  close  of  the 


I 

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I 


V  INOOMB  TAX  PBIMBB. 

i>ooks  on  December  31  should  be  returned.  If  the  partnership  endl 
its  fiscaJ  year  on  some  day  during  the  calendar  year  your  distnbativo 
share  of  its  earnings  or  profits  ascertained  at  that  time  should  be 
reported. 

(/)  All  items  of  foreign  income — that  is,  interest  upon  bonds  and 
mortgages  or  deeds  of  trust  or  other  similar  obligations  issued  by 
individuals  who  are  citizens  or  residents  of  foreign  countries,  toreigja 
corporations,  joint-stock  companies,  etc. 

(g)  Royalties  from  mine^  oil  and  gas  wells,  patents,  copyrights, 
franchises,  or  other  legalized  privileges. 

(A)  Dividends  on  stock  or  from  the  net  earnings  of  domestic  cor- 
porations, joint-stock  companies,  associations,  or  insurance  com- 
panies, whether  paid  in  cadi,  stock,  or  script.  As  the  net  earnings 
of  corporations,  joint-stock  companies,  etc.,  are  subject  to  the  tax 
imposed  upon  the  net  income  of  corporations,  dividends  from  such 
net  earnings  are  not  subject  to  the  normal  income  tax  in  the  hands 
of  the  shareholders  receiving  the  same,  but  they  are  to  be  returned 
for  the  additional  tax  purposes  and  are  subject  to  that  tax.  The 
rates  of  tax  to  be  assessed  against  a  dividend  received  during  the 
year  1917,  or  any  subsequent  year,  are  covered  by  the  answer  to 
question  53. 

21.  If  my  salary  for  Decem'ber,  1917,  is  not  paid  to  mt 
until  some  day  in  January,  1918,  or  later,  is  its  amount  to 
be  included  in  my  1917  retumP 

It  is  to  be  returned  for  the  year  during  which  it  was  actually 
received  by  you. 

22.  "A''  is  employed  by  a  corporation  at  an  annual  salary 
of  ^,000.  The  corporation,  being  in  financial  straits,  only 
paid  "A"  $2,000  during  each  of  the  years  1915  and  1916. 
In  1917,  ^<A"  received  his  salary  in  full  plus  the  balance  of 
the  salary  due  him  for  the  two  previous  years.  Must  he 
include  the  full  amount  received  in  1917  fai  his  return  for 
that  year? 

Yes.  Five  thousand  dollars  should  be  returned,  and  that  amount 
will  be  subjex^  to  income  tax  at  the  rates  prescribed  for  the  year  1917. 

23.  If  an  employer  agrees  to  pay  an  employee  a  certain 
stipulated  salary  and  furnish  him  with  room  and  board,  are 
the  latter  items  to  be  considered  in  computing  income  tax 
liabUity? 

Yes.  A  fair  rental  value  is  to  be  placed  upon  the  room  and  a  fair 
value  upon  the  meals  furnished,  and  their  amounts  reported  as  in- 
come by  the  employee.  If  the  services  of  the  employee  are  used  in 
the  employer's  business  or  tande  the  latter  may  claim  the  rent  paid 
by  him  for  the  room^  if  any,  and  the  actual  cost  of  the  meals  so 
furnished  as  a  deduction  under  the  head  of  "  Business  expenses." 

24.  An  employee  receives  a  per  diem  allowance  for  ex- 
penses in  addition  to  his  regular  salary.  Is  this  amount  to 
be  included  as  income  in  his  return? 

Yes.  The  entire  amount  of  allowance  received  diould  be  reported 
as  income.  The  difference  between  the  expenses  incurred  and  paid 
while  away  from  home  and  the  ordinary  expenses  while  at  home  may 
be  claimed  as  a  deduction. 


t 


INCOME  TAX  PBIMER.  V 

25.  If  I  enter  into  a  contract  in  1917  which  will  not  be 
completed  until  1918,  and  which  requires  me  to  make  ex- 
penditures for  material  and  labor,  provide  for  possible  losses, 
etc.,  must  I  include  the  advance  payments  I  receive  in  1917 
in  my  return  for  that  year? 

No.  As  you  are  unable  to  determine  what  amount  of  gain  or  profit 
you  will  derive  from  the  contract  until  it  is  completed,  the  payments 
received  thereon  during  1917  need  not  be  included  in  your  return  for 
that  year.  When  the  contract  is  completed  the  net  gain  or  profit 
derived  therefrom  should  be  reported  under  "  Gross  income"  in  your 
return  rendered  for  the  year  1918. 

26.  How  am  I  to  determine  what  amount  of  gain  or  profit 
derived  from  a  sale  of  property  is  returnable  for  income-tax 
purposes? 

If  you  acquired  the  property  sold  prior  to  March  1,  1913,  you 
should  take  its  fair  market  price  or  value  as  of  that  date,  add  thereto 
all  amounts  subsequently  expended  in  making  permanent  improve- 
ments, then  deduct  the  aggregate  of  all  claims  for  depre<?iation  in 
value  of  property  claimed  as  deductions  on  previous  returns,  and 
the  difference  between  the  result  thus  obtained  and  the  selling  price 
is  the  amount  to  be  reported  imder  "  Gross  income." 

If  you  purchased  the  property  on  or  after  March  1,  1913,  the  dif- 
ference between  its  cost,  plus  all  amounts  subsequently  expended  for 
permanent  improvements  less  depreciation  previously  claimed,  and 
its  selling  price,  is  to  be  returned. 

If  the  property  came  to  you  on  or  after  March  1,  1913,  as  an 
inheritance,  the  difference  between  the  appraised  value  placed  upon 
it  at  th  it  time  plus  all  amounts  subsequently  expended  for  perma- 
nent improvements  less  depreciation  previously  claimed,  and  its  sell- 
ing price,  is  to  be  returned. 

27.  How  is  the  value  as  of  March  1,  1913,  of  property  sold 
determined? 

No  method  of  determining  this  value  can  be  stated  which  will  ade- 
quately meet  all  circumstances.  What  that  value  was  is  a  question  of 
fact  to  be  established  by  any  evidence  which  will  reasonably  or  ade- 
quately make  it  appear. 

28.  When  is  a  farmer  to  return  for  tax  purposes  the  value 
of  crops  and  stocks  produced? 

The  value  of  grain,  stock,  and  other  products  produced  on  a  farm 
is  not  considered  taxable  income  until  reduced  to  cash  or  the  equiva- 
lent of  cash.  TheFefore,  if  crops  and  stock  were  produced  in  1916 
on  a  farm  owned  by  you  and  they  were  sold  in  1917,  the  total  amount 
received  therefor  is  to  be  included  under  "Gross  income"  in  your 
1917  return.  Crops  and  stock  produced  in  1917,  and  on  hand  Decem- 
ber 31  of  that  year,  need  not  be  considered;  but  the  amount  received 
therefor  should  be  included  in  your  return  rendered  for  the  year  dur- 
ing which  they  are  sold. 

Farmers  who  keep  books  according  to  some  approved  method  of 
accounting,  which  clearly  show  the  net  income,  may  prepare  their 
returns  from  such  books,  although  the  method  of  accounting  may 
not  be  strictly  in  accordance  with  the  above  paragraph. 
H.  Doc.  841,  65-2 2 


10 


IliOOMB  TAX  PBIMEB. 


29.  I  rent  a  farm  on  shares.  When  is  my  share  of  the 
crops  and  stock  to  be  taken  into  consideration? 

Only  for  the  year  in  which  sold. 

30.  Is  a  farmer  required  to  report  the  value  of  the  farm 
produce  which  is  consumed  by  himself  and  family? 

No ;  but  any  amount  of  expense  incurred  in  producing  garden  truck, 
or  other  products  so  consumed,  can  not  be  claimed  as  a  deduction. 

31.  If  a  farmer  exchanges  produce  for  merchandise,  gro- 
ceries, etc.,  is  the  value  of  such  merchandise  to  be  returned 
for  tax  purposes? 

Yes;  the  price  placed  b;^  the  merchant  upon  the  goods  exchanged 
for  farm  produce  is  to  be  included  as  income  in  the  farmer's  return. 

32.  A  tenant,  under  the  terms  of  a  lease,  is  required  to  pay 
a  certain  cash  rental  and  in  addition  make  certain  improve- 
ments. Is  the  cost  of  these  improvements  held  to  be  taxable 
income  to  the  property  owner? 

Report  cash  rental  for  year  in  which  received.  The  difference 
between  cost  of  improvements  and  a  reasonable  allowance  for  the 
exhaustion,  wear  and  tear  of  the  property  arising  out  of  its  use  or 
employment  in  tne  business  or  trade  of  lessee  during  the  period  of 
its  life  under  the  lease  should  be  returned  as  income  to  the  lessor 
for  the  year  during  which  the  lease  terminates.     (See  T.  D.  2442.) 

33.  Special  payments,  designated  as  "  Bonuses,"  are  often 
made  to  ofla.cers  and  employees  of  corporations,  firms,  and 
individuals.  Are  such  items  of  Income  subject  to  tax  in  the 
hands  of  their  recipients? 

Any  bonus  or  other  item  of  compensation  paid  to  an  employee 
in  addition  to  his  regular  salary  or  wage  under  a  contract,  expressed 
or  implied,  as  additional  compensation  for  services  rendered  as  a 
reward  for  past  endeavors,  or  as  a  stimulus  to  further  zeal  and  en- 
thusiasm in  the  discharge  of  his  duties,  is  held  to  constitute  taxable 
income  which  should  be  reported  under  "  Gross  income "  in  the 
employee's  return  rendered  for  the  year  during  which  received. 
Christmas  remembrances,  anniversary  gifts,  etc.,  from  an  employer 
to  an  employee  do  not  constitute  such  items  as  are  subject  to  the  in- 
come tax. 

34.  Is  an  individual  contractor  who  constructs  a  public 
highway,  a  bridge,  a  drainage  system,  etc.,  for  the  State, 
county,  or  a  municipality,  held  to  be  an  employee  of  the 
political  subdivision  for  which  the  work  is  performed? 

No;  and  therefore  the  income  derived  from  his  contract  is  not 
exempt  from  the  Federal  income  tax. 

35.  What  method  should  a  merchant  adopt  to  ascertain  the 
amount  of  gain  or  profit  which  is  to  be  reported  under  gross 
income? 

Any  individual  who  conducts  a  grocery,  dry  goods,  clothing,  or 
farm-implement  business  or  any  other  business  which  requires  that 
a  stock  be  carried  should  take  an  inventory  at  the  close  oi  each  cal- 
endar year.  To  the  total  of  his  inventory  taken  at  the  beginning 
of  the  year  for  which  the  return  is  to  be  rendered  should  be  added 


INCOME  TAX  PRIMER. 


11 


\ 


the  cost  of  all  goods  purchased  during  that  year,  and  the  difference 
between  the  amount  thus  obtained  and  the  total  of  his  inventory 
taken  at  the  close  of  the  tax  year,  plus  his  total  gross  receipts,  is  the 
amount  to  be  reported  under  "  Gross  income."  Gross  recfclpts  should 
not  be  reported  under  "Gross  income"  and  the  cost  of  the  goods 
purchased  claimed  as  a  deduction. 

36.  A  piano  dealer  sells  an  instrument  under  a  contract 
which  states  that  payment  therefor  is  to  be  made  in  monthly 
installments,  and  that  the  title  to  the  instrument  is  to  remain 
with  the  dealer  until  the  last  payment  is  made.  How  is  the 
latter  to  report  the  amount  of  profit  derived  from  this  trans- 
action? 

It  is  held  that  every  dollar  received  under  such  a  contract  represents. 
in  part,  the  return  of  a  portion  of  the  cost  of  the  article  to  the  dealer 
and  a  portion  of  the  profit  to  be  derived  frtjm  the  transaction ;  and  that 
the  amount  of  profit  represented  by  all  payments  during  the  tax  year 
should  be  included  in  the  dealer's  personal  return  rendered  for  that 
year.  For  example,  a  piano  which  cost  the  dealer  $300  is  transferred 
to  another  under  a  contract  calling  for  20  monthly  payments  of  $20 
each,  a  total  of  $400.  Each  montlily  payment  represents  a  return  of 
capital  amounting  to  $15  and  a  profit  amounting  to  $5,  and  multiply- 
ing this  latter  amount  by  the  number  of  payments  received  during  the 
year  yields  the  amount  to  be  returned  as  income  for  that  year.  When 
there  is  a  lapse  or  default  in  payment  and  the  dealer  becomes  re- 
possessed of  the  article,  the  entire  amount  theretofore  paid  and 
credited  to  principal  from  date  of  contract  to  date  of  default  is  income 
to  be  included  in  a  return  of  income,  for  the  reason  that  it  is  held  that 
such  an  amount  constitutes  rental  for  the  use  of  the  article.  In  case 
of  such  default  a  reasonable  allowance  may  be  claimed  as  a  deduction 
to  cover  sucli  depreciation  as  may  have  actually  occurred  in  the  value 
of  the  repossessed  article  by  reason  of  its  use. 

37.  I  have  two  children  who  live  at  home  and  are  regularly 
employed.  One  is  17  years  old;  the  other,  21  years  old.  Am 
I  required  to  include  the  amount  of  income  which  accrues  to 
each  during  a  calendar  year  in  my  own  personal  return? 

As  the  first  child  has  not  reached  its  majority  and  is  still  legally 
under  your  control,  the  amount  of  its  income  is  to  be  included  in  your 
personal  return  and  is  subject  to  tax  in  your  hands.  The  income  of 
the  child  which  has  attained  its  majority  is  not  to  be  included  in  your 
return  and  is  only  subject  to  tax  in  the  hands  of  that  child. 

38.  Must  I  include  in  my  personal  return  the  amount  of 
interest  I  receive  on  Liberty  Loan  bonds,  or  is  that  interest 
exempt  from  tax? 

All  interest  derived  from  the  Liberty  Loan  3 J  per  cent  bonds 
issued  under  the  act  of  April  24,  1917,  is  exempt  from  both  the 
normal  and  additional  income  tax. 

Interest  derived  from  the  Liberty  Loan  4  per  cent  bonds  issued 
under  the  act  of  September  24,  1917,  is  exempt  from  the  normal  in- 
come tax ;  but  so  much  of  the  interest  as  is  derived  from  such  bonds, 
the  principal  of  which  exceeds  $5,000,  is  subject  to  the  additional 
income  tax;  that  is,  if  you  hold  $8,000  of  Liberty  Loan  4  per  cent 


12 


nrOOMB  TAX  PBIMEK. 


bonds  the  interest  from  $5,000,  or  $200,  is  exempt  from  tax,  and  the 
balance  of  the  interest,  or  $120,  is  subject  to  the  additional  tax. 

89.  I  held  an  endowment  life  insurance  policy  upon  which 
I  paid  premiums  for  20  years.  In  1917  that  contract  matured 
and  I  received  its  face  value,  or  $1,000.  Must  I  return  the 
entire  amount  received? 

No.  Return  only  the  difference  between  the  aggregate  amount  of 
premium  paid  and  the  amount  received  upon  maturity  of  the  contract 

40.  Are  commissions  on  renewal  premiums  on  insurance 
policies  subject  to  income  taxP 

Yes;  such  commissions  received  by  insurance  agents  on  account  of 
business  written  are  taxable  income  iror  the  year  in  which  received. 

41.  '*A,''  who  is  the  employee  of  a  coi*poration,  was  injured 
and  under  the  laws  of  the  State  in  which  the  accident  oc- 
curred he  received  $5,000  on  account  of  the  injury  he  suf- 
fered.   Must  the  amount  tlius  received  be  reported  as  income? 

Yes.  Any  amount  received  under  an  employers'  liability  act  or 
workman's  compensation  act,  or  any  other  similar  act,  or  as  the 
result  of  a  settlement  or  compromise  for  "pain  and  suffering,"  is 
held  to  be  such  income  as  is  subject  to  the  Federal  income  tax.  This 
ruling  is  also  applicable  to  any  amount  received  under  the  terms  of  an 
accident  iusurance  policy. 

42.  I  purchased  a  6  per  cent  $100  coupon  bond  at  its  fact 
value,  plus  $1.50;  that  is,  three  months'  accrued  interest. 
Three  months  later  I  detached  a  coupon  therefrom  and  col- 
lected $3  interest.  Must  the  entire  amount  of  interest  re- 
ceived be  returned  as  income? 

No.  Report  only  so  much  interest  as  accrued  after  the  date  of 
your  purchase.    It  is  the  seller's  duty  to  report  the  balance. 

43.  Do  the  pensions  and  retired  pay  of  ex-officers  and  men 
of  the  United  States  military  and  naval  forces  constitute 
items  of  ta:x:able  income? 

Yes. 

44.  I  own  stock  in  a  bank  which,  under  a  State  law,  is 
required  to  pay  the  taxes  assessed  against  such  stock.  How 
is  this  matter  to  be  handled  for  income-tax  purposes? 

The  propoi'tionate  part  of  the  entire  amount  of  taxes  so  paid  by 
the  bank,  which  is  properly  charje^eable  ajjainst  the  number  of  shares 
held  by  you,  should  be  reported,  for  additional  tax  purposes,  in  your 
personal  return,  as  a  dividend,  and  then  claimed  as  a  deduction  under 
the  heading  of  "  Taxes.'' 

45.  In  1915  I  purchased  10  shares  of  the  preferred  stock  of 
a  corporation  and  received  10  shares  of  common  stock  as  a 
bonus.    Has  the  value  of  this  bonus  a  taxable  status? 

No;  but  when  the  stock  received  as  a  bonus  is  bold,  the  entire 
proceeds  of  the  sale  are  income  subject  to  normal  and  additional  tax 
and  should  be  included  in  your  return  rendered  for  the  year  during 
which  the  sale  is  made. 


INCOME  TAX  PRIMER. 


18 


H 


)     i 


46.  Are  amounts  placed  to  the  credit  of  a  shareholder  in  a 
building  and  loan  association  subject  to  income  tax? 

Any  amount  credited  to  a  shareholder  when  the  title  to  such 
credit  passes  to  the  latter  at  the  time  of  the  credit  has  a  taxable 
status  for  the  normal  and  additional  income  tax  and  should  be  in- 
cluded in  the  return  rendered  for  the  year  during  which  the  credit 
is  made. 

Where  the  amount  of  accumulations  credited  does  not  become 
available  to  the  shareholder  until  the  maturity  of  a  share  it  need 
not  be  reported  as  income,  but  upon  maturity  of  the  share  the 
amount  received  in  excess  of  the  total  amount  actually  paid  in  by 
the  shareholder  is  to  be  returned. 

47.  I  hold  stock  in  a  corporation  which  in  1917  increased 
its  capital  and  gave  me  the  right  to  subscribe  for  additional 
stock  at  par.  If  I  sell  this  "  right,"  are  the  proceeds  to  be 
returned  for  tax  purposes? 

Yes;  the  entire  proceeds  from  the  sale  of  a  "right"  to  purchase 
additional  stock  should  be  included  in  the  return  rendered  for  the 
year  during  which  the  sale  is  made  and  will  be  subject  to  both  the 
normal  p.nd  additional  tax. 

48.  Are  payments  of  alimony  to  be  returned  for  tax  pur- 
poses by  their  recipient? 

Alimony  is  not  held  to  be  income  to  the  recipient,  nor  is  it  held  to 
be  such  an  item  as  is  allowable  as  a  deduction  to  the  person  paying 
the  same. 

49.  Where  service  is  rendered  for  a  stipulated  price,  wage, 
or  salary,  and  paid  with  somtething  other  than  money  shall 
consideration  be  given  the  transaction  for  income-tax  pur- 
poses? 

Yes;  the  stipulated  value  of  the  service  in  terms  of  money  is  the 
value  at  which  the  thing  taken  in  payment  is  to  be  considered,  and  the 
amount  of  that  value  is  to  be  report^>d  as  income. 

A\"here  there  is  no  stipulation  as  to  the  value  of  the  service,  and 
payment  therefor  is  made  with  something  other  than  money,  the  fair 
market  value  of  the  thing  taken  in  payment  is  the  amount  to  be  re- 
turned as  income. 

DIVIDENDS. 

50.  The  net  earnings  of  a  corporation  in  which  I  held  stock 
in  the  year  1916  amounted  to  $50,000,  which  amount  was 
carried  to  surplus  account.  Its  net  earnings  from  January  1 
to  December  31,  1917,  amounted  to  $70,000,  and  on  this  latter 
date  these  last  earnings  were  carried  to  surplus  and  a  cash 
dividend  of  $50,000  declared  and  soon  thereafter  paid.  What 
income  taxes  are  to  be  assessed  against  this  dividend? 

Section  31  (h)  of  the  act  of  September  8,  1916,  as  amended  by 
the  war  revenue  act,  provides,  in  part,  as  follows: 

Any  distribution  made  to  tho  shareholders  or  members  of  a  corporation, 
Joint-stoclj  company  or  nssoeintion,  or  Insurance  company,  in  tlie  year  1917,  or 
Bubsetiuent  tax  years,  shall  be  deemed  to  have  been  made  from  the  most  re- 
cently accumulated  undivided  profits  or  surplus,  and  shall  constitute  a  part  of 


I 


14  IKCOMB  TAX  PBOCEB. 

the  annual  Income  of  the  distributee  for  the  year  in  which  received,  and  ehall 
be  taxed  to  the  distributee  at  the  rates  prescribed  by  law  for  the  years  In  which 
such  profits  or  surplus  were  accumulnted  by  the  corporation,  Joint-stock  com- 
pany or  association,  or  Insurance  company. 

Therefore,  the  dividend  to  which  you  refer  is  to  be  charged  against 
the  most  recently  accumulated  earnings  or  surplus;  that  is,  against 
the  $70,000  earned  during  1917  and  carried  to  surplus  on  the  day  the 
dividend  was  declared,  and  it  will  be  subject  to  the  additional  tax 
at  the  rates  prescribed  bv  the  act  of  September  8,  1916,  and  also,  at 
the  rates  prescribed  by  tiie  war  revenue  act  of  October  3,  1917. 

51.  Suppose  that  instead  of  declaring  a  dividend  of 
$50,000,  this  corporation  had  declared  a  dividend  of 
$100,000? 

If  such  had  been  the  case,  the  entire  amount  of  net  earnings  car- 
ried to  surplus  on  December  31,  1917,  would  have  been  subject  to 
additional  tAX  at  the  same  rates  as  the  dividend  mentioned  in  your 
inquiry,  next  above,  and  the  balance,  or  $30,000,  would  have  oeen 
held  to  have  been  paid  from  the  1916  earnings  and  would  have  been 
subject  to  additional  tax  only  at  the  rates  prescribed  in  the  act  of 
September  8,  1916. 

52.  Assuming  that  instead  of  paying  this  dividend  in  cash 
a  corporation  had  capitalized  the  same  amount  of  surplus 
as  was  distributed  in  cash,  or  $100,000,  and  Issued  the  new 
stock  to  its  shareholders  as  a  dividend.  Would  this  dividend 
be  taxable? 

Yes;  just  the  same  as  though  it  had  been  paid  in  cash. 

53.  A  corporation  began  business  January  1^  1912.  Its 
net  earnings  were  as  follows: 

Jan.  1,  1912,  to  Mar.  1,  1913 $10,  765 

Mar.  1.  1913,  to  Jan.  1,  1914 6,  220 

Pot  the  year  1914 7.  347 

Por  the  year  1915 • .-  11,  OOO 

Pot  the  year  1916 «  15,  300 

Jan.  1  to  Dec.  31,  1917 27,  400 

Amount  of  snrplus  on  hand  Dec.  81,  1917 77,  032 

The  corporation  never  paid  a  dividend  until  December  31. 
1917,  on  which  date  it  declared  and  paid  a  dividend  of 
$77,032.    How  will  this  dividend  be  taxed? 

That  portion  of  the  dividend  which  represents  the  distribution  of 
1917  earnings,  or  $27,400,  will  be  subject  to  the  additional  tax  at  the 
rates  prescribed  in  the  act  of  September  8,  1916,  and  also  in  the  war- 
revenii^  act  of  October  3, 1917;  and  that  portion  whicli  represents  1916 
earnings,  or  $15,300,  at  the  rates  prescribed  in  the  act  of  September  8, 
1916,  only;  that  portion  which  repre^^ents  earnings  which  accruea 
from  March  1,  1913,  to  January  1,  1910,  at  the  rates  of  additional 
tax  prescribed  in  the  act  of  October  3,  1913.  The  remainder,  or 
$10,765,  is  exempt  from  tax  under  that  portion  of  section  31  (6) 
which  states  that — 

But  nothing  herein  shall  be  construed  as  taxing  any  earnings  or  profits 
accrued  prior  to  March  1,  1913,  but  surb  earnings  or  profits  may  be  distributed 
In  stoclj  dividends  or  otherwise,  exempt  from  the  tax,  after  the  distribution 
of  earnings  and  profits  accrued  since  March  1,  1913,  has  been  made. 


INCOME  TAX  PEIMEE. 


151 


J^ 


? 


54.  Will  it  be  the  taxpayer's  duty  to  advise  himself  what 
proportion  of  a  dividend  received  by  him  is  properly  charge- 
able, under  section   31(b),   act  of  September   8,    1916,   as  ^ 
amended,  to  the  corporate  earnings  or  profits  for  each  tax 
year? 

Yes. 

55.  Assuming  that  a  corporation  had  assets  which  had  i 
greatly  appreciated  in  value  and  had  carried  the  amount  of  | 
that  appreciation  to  its  surplus  account  and  capitalized  same, 
or  that  it  capitalized  its  good  will,  and  then  issued  the  new 
stock  to  its  shareholders  as  a  dividend,  would  this  dividend  be 
subject  to  tax? 

Only  such  dividends  as  represent  a  distribution  of  earnings  or 
profits  accrued  since  March  1,  1913,  are  subject  to  the  additional  tax 
when  received  by  the  shareholders.  As  appreciation  estimated  to 
have  occurred  in  the  value  of  the  assets  held  and  good  will  do  not 
represent  actual  earnings,  profits,  or  income,  a  dividend  based  upon  ; 
a  capitalization  of  any  such  items  is  not  subject  to  tax  when  received 
by  the  shareholders.  "  It  should  be  understood,  however,  that  when 
any  of  the  stock  received  in  payment  of  such  a  dividend  is  sold,  the 
entire  proceeds  derived  from  the  same  are  to  be  returned  under 
"Gross  income"  in  the  shareholders'  return  rendered  for  the  year 
during  which  the  sale  is  made,  and  will  be  subject  to  both  the  normal 
and  additional  income  taxes. 

56.  A  corporation  on  July  1,  1917,  declared  a  dividend 
and  in  that  declaration  specifically  stated  that  it  would  be 
paid  out  of  earnings  or  profits  which  had  accumulated  and 
were  on  hand  prior  to  March  1,  1913.  Is  this  dividend  to  be 
returned  for  income-tax  purposes? 

No.  Section  31  (6),  act  of  September  8,  191G,  as  amended,  pro- 
vides that  none  of  its  provisions  shall  apply  to  any  distribution  made 
prior  to  August  6,  1917,  out  of  earnings  or  profits  accrued  prior  to 
March  1,  1913. 

57.  Are  dividends  on  paid-up  life  insurance  policies  sub- 
ject to  income  tax? 

Dividends  on  paid-up  life  insurance  policies  are  subject  to  the 
additional  tax  for  the  year  in  which  received. 

GENERAL  DEDUCTIONS. 

58.  In  rendering  a  personal  return  what  items  may  I  claim 
as  deductions? 

See  section  5  of  the  act  of  Sei)tember  8,  19 IG,  as  amended  by  the 
war- re  venue  act. 

59.  What  constitutes  an  item  allowable  as  a  deduction 
under  the  head  "  Business  expenses  ''? 

All  amounts  of  expenses  actually  paid  during  the  tax  year  in  the 
conduct  of  a  business,  trade,  or  profession. 

This  includes  all  amounts  actually  paid  by  a  farmer  for  labor  in 
preparing  his  land  for  a  crop  and  the  cuitivation.  haivesting,  and 
marketing  of  the  crop;  the  cost  of  the  seed  and  fertilizer  used;  the 


16 


INCOME  TAX  PBIMEfL 


ftmonnts  expended  for  labor  used  in  caring  for  live  stock  and  tht 
cost  of  the  feed:  the  cost  of  stock  purchased  for  the  purpose  of 
resale.  (It  should  be  understood,  however,  that  if  such  cost  is 
claimed  as  a  deduction,  the  entire  proceeds  received  upon  a  sale  of 
the  stock  is  to  be  returned  as  income.)  The  amounts  actually  paid  in 
making  repairs  to  farm  buildings,  but  not  the  dwelling  house;  repairs 
to  fences,  farm  machinery,  etc. ;  the  cost  of  materials  for  immediate 
use  and  farm  tools  which  are  used  up  in  the  course  of  a  year  or  two. 
such  as  binding  twine,  stock  powders,  pitchforks,  spades,  etc.;  and 
the  amount  of  rent  paid  for  a  farm  may  also  be  claimed.  The 
amounts  paid  for  live  stock  which  is  to  be  used  for  breeding  pur- 
poses are  held  to  represent  investment  of  capital  and  are  not  allow- 
able as  deductions. 

A  merchant  may  claim  as  deductions  the  amounts  paid  for  adver- 
tising, hire  of  clerks,  and  other  employees;  the  cost  of  the  light,  fuel, 
water,  telephones,  etc.,  used  in  or  at  his  place  of  business;  drayage 
and  freight  bills;  the  cost  of  operating  delivery  wagons,  trucks,  and 
the  repairs  to  same. 

The  cost  of  goods  purchased  for  resale  is  not  to  be  claimed  as  a 
deduction,  as  a  credit  for  that  cost  may  be  obtained  by  following  the 
method  of  computation  outlined  in  the  answer  to  the  thirty-fifth 
question. 

A  physician  may  claim  as  deductions  the  cost  of  medicines  and 
medical  supplies  used  by  him  in  the  practice  of  his  profession,  ex- 
penses paid  in  the  operation  and  repair  of  an  automobile  used  in 
making  professional  calls,  dues  to  medical  societies  and  subscriptions 
to  medical  journals,  the  expenses  of  attending  medical  conventions, 
the  rent  paid  for  office  rooms  and  the  hire  of  office  assistants,  the 
cost  of  the  fuel,  light,  water,  telephone,  etc.,  used  in  such  office  rooms. 
Amounts  expended  for  books,  medical  supplies,  and  surgical  instru- 
ments of  a  permanent  character  are  not  allowable  as  deductions. 

This  in  a  general  way  outlines  the  ordinary  and  usual  expenses 
incurred  by  a  farmer,  a  merchant,  or  a  professional  man,  which  may 
be  claimed  as  deductions,  and  the  principles  underlying  these  allow- 
ances are  equally  applicable  in  the  case  of  anyone  engaged  in  a  busi- 
ness, trade,  or  profession.  In  short,  all  expenses  connected  directly 
and  solely  with  the  conduct  of  an  income-producing  business,  trade, 
profession,  or  vocation  are  allowable. 

Items  of  personal  expense  or  items  connecte-d  in  any  way  with  the 
support,  maintenance,  and  well-being  of  a  family  are  not  allowed; 
neither  are  the  amounts  paid  for  tools,  implements,  vehicles,  ma- 
chinery, or  surgical  instruments  which  are  more  or  less  permanent  in 
character,  nor  the  cost  of  medical,  law,  or  other  professional  books, 
nor  amounts  expended  in  making  permanent  imprnvement-s  or  bet- 
terments of  any  kind  whatsoever,  allowable  as  de-ductions.  The^e 
latter  items  are  held  to  be  investments  of  capital  upon  which  depre- 
ciation may  be  claimed. 

60.  I  employ  a  man  to  assist  me  in  operating  my  farm  and 
a  woman  to  assist  about  the  house.  Is  the  compensation  paid 
to  each  allowable  as  a  deduction? 

Unque-stionably,  as  to  the  amount  paid  to  the  male  employee,  but 
a  line  must  be  drawn  as  to  the  amount  paid  to  the  female  employee. 
If  her  time  is  employed  entirely  in  taking  care  of  milk  and  cream 


INCOME  TAX  PRIMEB. 


17 


I 


produced  for  sale,  in  the  production  of  butter,  cheese,  etc.,  the  care  of 
milk  cans  and  churns,  or,  if  a  separate  table  is  maintained  for  laborers 
employed  on  the  farm  and  her  services  are  used  entirely  in  the  prepa- 
ration and  serving  of  the  meals  furnished  the  laborers  and  in  caring 
for  their  rooms,  the  compensation  paid  her  constitutes  an  allowable 
deduction.  If,  however,  she  is  employed  to  assist  in  caring  for  the 
farmer's  own  household,  no  deduction  can  be  claimed. 

61.  If  I  employ  a  minor  son  or  daughter  to  assist  me  in  my 
business  or  trade  and  I  pay  a  salary  or  wage  for  such  assist- 
ance, may  I  claim  the  amount  as  a  deduction? 

No.  If,  hoAvever,  the  son  or  daughter  lias  attained  his  or  her 
majorit3\  the  amount  of  compensation  paid  for  his  or  her  services 
mav  be  so  claimed. 

62.  Can  a  taxpayer  claim  a  deduction  for  his  own  re- 
muneration? 

Wages  or  salary  drawn  by  a  taxpayer  from  his  own  business  are 
more  in  the  nature  of  a  charge  out  of  profits  than  a  charge  against 
profits.  If  such  could  be  deducted  they  would  merely  be  added  to 
his  income,  the  effect  of  which  w^ould  be  to  take  money  out  of  one 
pocket  and  put  it  in  another.  Therefore  no  deduction  can  be  claimed 
for  income-tax  purposes. 

(Note. — Anj/  such  wage  or  salary  viay  he  entered  on  Form  lOJfi^ 
revised  January^  1918,  for  excess-profits  tax  purposes.) 

63.  Can  the  amounts  expended  by  a  business  man  in  enter- 
taining out-of-town  customers,  or  prospective  customers,  be 
claimed  as  deductions? 

Yes.  If  the  sole  purpose  of  the  business  man  in  making  such  ex- 
penditures is  to  cultivate  the  good  will  of  his  customers  and  secure 
an  increase  in  trade  they  may  be  so  claimed. 

64.  Can  a  salesman  working  on  a  commission  basis  claim 
as  deductions  the  amounts  expended  from  his  own  funds  for 
railroad  fare,  excess  baggage,  tsisicab  or  street  car  fare,  show 
rooms,  assistants,  advertising  etc.? 

Yes.  If  he  is  not  reimbursed  for  such  expenditures  by  his  firm,  he 
should  report  under  ''  Gross  income  "  the  total  amount  of  commis- 
sions received,  and  he  may  then  claim  such  expenses  as  were  actually 
incurred  and  paid  in  the  earning  of  those  commissions. 

65.  '^A,^'  who  is  employed  in  a  city,  has  his  home  in  a 
suburb.  He  pays  car  fare  between  his  home  and  place  of 
employment  and  takes  his  noon  lunch  in  the  city.  Can  the 
amounts  expended  for  car  fare  and  lunch  be  claimed  as  a 
buSlTiess  expense? 

No,  as  such  amounts  are  held  to  be  items  of  personal  expense. 

66.  Are  the  items  of  expense  incurred  and  paid  by  me 
during  the  calendar  year  in  connection  with  a  farm  which  I 
lease  to  another  on  a  cash  or  crop-share  rental  basis,  such  as 
repairs  to  fences,  farm  buildings,  etc.,  allowable  as  deduc- 
tions? 

Yes. 

H.  Doc.  841,  65-2 3 


18 


INCOME   TAX   PRIMER. 


67.  Can  the  amount  of  life  insurance  premiums  and  pre- 
miums paid  for  insurance  on  my  residence  be  claimed  as 
deductions? 

No,  as  these  are  held  to  be  items  of  personal  expense.  If,  however, 
3'ou  pay  premiums  on  insurance  policies  covering  farm  buildings, 
other  than  your  dwelling  house,  or  on  any  property  used  for  business 
purposes,  these  premiums  are  allowable  as  deductions. 

68.  An  individual  or  a  partnership,  to  protect  his  or  its 
business  interests,  insures  the  life  of  one  or  more  employees 
or  members.  Can  the  premiums  paid  for  such  insurance  be 
considered  a  business  expense  and  claimed  as  a  deduction? 

No.  However,  should  the  policy  become  due  and  payable,  the  indi- 
vidual or  partnership  should  deduct  the  aggregate  amount  of  pre- 
miums paid  from  the  proceeds  of  the  policy  and  return  the  balance  as 
income. 

69.  A  tenant,  under  the  terms  of  a  lease,  is  obligated  to 
pay  a  certain  cash  rental  and  all  taxes  assessed  against  the 
property  and  keep  it  insured.  May  he  claim  as  a  business 
expense  the  aggregate  amovint  of  rental,  taxes,  and  insurance 
premiums  paid? 

Yes;  if  the  property  is  used  by  the  tenant  for  business  or  trade  pur- 
poses and  not  as  a  home,  the  aggregate  amount  may  be  claimed  as  a 
deduction  for  the  year  during  which  actually  paid. 

-  70.  I  own  stock  in  a  corporation  which,  in  1917,  assessed 
each  of  its  stockholders  $50  on  each  share  held.  Can  the 
amount  paid  by  me  be  claimed  as  a  deduction? 

No.  Assessments  made  by  a  corporation  on  its  capital  stock  are 
regarded  as  further  investments  of  capital  and  do  not  constitute  an 
allowable  deduction  in  the  return  of  the  individual. 

71.  You  say  that  assessments  made  against  corporation 
stockholders  can  not  be  claimed  as  deductions.  In  California 
and  other  States  fruit  growers,  ranchers,  and  farmers  are 
shareholders  in  irrigation  companies  which  are  mutual  in 
character,  and  they  are  often  assessed,  in  proportion  to  their 
holdings  of  stock,  for  sufficient  amounts  to  make  repairs  to 
the  irrigation  system,  cleaning  out  of  pipes,  laterals,  etc. 
Can  such  assessments  not  be  claimed  as  deductions  under  the 
head  of  business  expenses? 

Yes.  Where  the  purpose  of  the  assessment  is  merely  to  raise  funds 
to  keep  the  irrigation  system  in  usable  condition  and  not  to  make 
extensions  or  betterments,  the  amount  assessed  against  each  share- 
holder may  be  so  claimed. 

72.  If  a  physician,  or  other  professional  or  business  man, 
rents  a  home  and  uses  a  portion  of  same  for  professional  or 
business  purposes,  may  any  portion  of  the  rent  paid  for  that 
home  be  claimed  as  a  business  expense? 

Yes.  The  proportion  of  the  rent  paid  which  is  properly  charge- 
able to  the  number  of  rooms  so  used  may  be  claimed  as  a  deduction. 

73.  In  1917  I  purchased  a  property,  the  title  to  which 
proved  defective,  and  in  order  to  straighten  the  matter  out 


t 


\ 


INCOME  TAX  PKIMEH. 


19 


I  employed  an  attorney  and  resorted  to  court  proceedings. 
Can  I  claim  a  deduction  to  cover  the  fee  paid  the  attorney 
and  the  court  cost? 

No.  Such  items  are  held  to  bo  a  part  of  the  cost  of  the  property 
and  therefore  not  allowable  as  deductions. 

74.  If  I  employ  an  architect  to  prepare  plans  for  a  building 
to  be  used  for  business  purposes,  may  the  fee  paid  to  the 
architect  be  claimed  as  a  business  expense? 

No.  Amounts  expended  for  an  architect's  services  are  held  to  be 
a  part  of  the  cost  of  the  building  and  not  such  items  as  may  be 
claimed  as  deductions. 

75.  You  have  heretofore  stated  that  only  such  items  of  in- 
come as  have  actually  been  paid  to  me  during  the  tax  year 
are  to  be  reported,  and  only  such  items  of  expense  as  I  have 
actually  paid  during  that  year  claimed  as  deductions.  Can 
not  a  business  or  professional  man  who  keeps  a  set  of  books 
and  enters  thereon  as  income  the  cost  of  goods  sold  on  credit, 
or  fees  earned  but  not  paid,  and  charges  to  expense  account 
items  which  have  not  been  paid  by  him,  report  his  net  income 
for  the  year  as  shown  by  his  books  when  they  are  balanced 
at  the  end  of  the  calendar  year? 

Section  8  (^7)  of  the  act  of  September  8,  1916,  states  that : 

An  Inrlividual  keopins  aaiiunts  upon  any  basis  other  than  that  of  nftiial  re- 
ceipts au<l  (lisf>iirsements,  unless  such  other  basis  d«^>es  not  clearly  refle<*t  his 
income,  may.  subject  to  rejruljstions  made  by  the  Commissioner  (»f  Interna!  Reve- 
nue, with  the  approvjd  of  the  Secretary  of  the  Treasury,  make  his  return  upon 
tlie  basis  ui)on  which  Ids  accounts  are  kept,  in  which  case  the  tax  shall  be  com- 
puted upon  his  income  as  so  returned. 

76.  What  is  meant  by  the  statement  in  the  Isiw  that  all 
interest  paid  within  the  year  upon  the  indebtedness  of  a  tax- 
payer, **  except  dn  indebtedness  incurred  for  the  purchase  of 
obligations  or  securities  the  interest  upon  which  is  exempt 
from  taxation  as  income  under  this  title  ''  may  be  claimed 
as  a  deduction? 

If  a  taxpayer,  desiring  to  do  his  patriotic  dnty,  borrowed  money 
to  invest  in  Liberty  Loan  3|  per  cent  bonds,  or  if  he  borrowed  money 
to  invest  in  the  bonds  of  a  State,  county,  or  municipality,  or  any  se- 
curity issued  under  the  provisions  of  the  Federal  farm-loan  act  of 
July  17,  1916,  or  any  other  securities  the  interest  from  which  is  not 
subject  to  income  tax  as  explained  in  the  answer  to  the  eighteenth 
question,  the  interest  paid  by  the  taxpayer  upon  the  money  so  bor- 
rowed can  not  be  claimed  as  a  deduction.  All  other  interest  paid 
within  the  year  may  be  so  claimed. 

77.  If  I  have  a  certain  sum  of  money  invested  in  a  farm 
or  business,  may  I  claim  as  a  deduction,  under  the  head  of 
interest,  an  estimated  amount  of  interest  which  might  have 
accrued  to  me  had  that  money  been  deposited  in  a  bank  or 
invested  in  interest-paying  securities? 

No. 


20 


INCOME   TAX  PRIMER. 


78.  What  forms  of  taxes  can  not  be  claimed  as  deductions? 
Taxes  assessed  affainst  an  individual  on  property  owned  by  him  to 

pay  for  the  paving  of  a  street  contiguous  to  his  property,  the  con- 
struction of  a  sewer,  sidewalk,  etc.,  the  sprinkling  or  oiling  of  a 
street  in  front  of  his  home,  the  construction  of  levees  to  protect,  or 
ditches  to  drain,  property  owned  by  him,  can  not  be  claimed  as  de- 
ductions. In  short,  such  taxes  as  are  not  general  in  nature  and  are 
levied  on  account  of  some  work  or  privilege  the  benefit  of  which 
accrues  to  a  limited  number  of  property  owners,  of  which  the  tax- 
payer is  one,  are  not  allowable  deductions. 

79.  If  I  pay  any  amount  of  personal  income  tax  for  the 
year  1917,  may  I  claim  that  amount  as  a  deduction  for  the 
year  1918? 

No.  The  income-tax  law  states  that  income  taxes  are  not  allow- 
able as  deductions.  Under  this  provision  income  tax  paid  in  1917 
on  income  received  in  1016  or  any  previous  year  can  not  be  deducted. 

80.  In  1916  I  bought  certain  stocks  and  bonds  for  $5,000, 
and  in  1917  the  value  of  these  securities  dropped  to  $4,000. 
May  I  claim  the  difference  of  $1,000  as  a  loss  in  computing 
my  income  tax  liability? 

No.  Under  the  provisions  of  the  fourth  and  fifth  paragraphs  of 
section  5  of  the  act  of  September  8,  1916,  only  such  losses  as  have 
actually  been  sustained  during  the  year  can  be  claimed;  that  is,  the 
loss  miist  have  resulted  from  a  completed  and  closed  transaction. 
In  your  case  you  still  own  the  securities.  They  may  go  up  in  value 
during  1918,  and  until  they  are  sold  or  otherwise  disposed  of  you 
are  unable  to  determine  whether  you  will  suffer  a  loss  or  derive  a 
gain  from  your  investment.  In  other  words,  no  account  is  to  be 
taken,  for  income-tax  purposes,  of  fluctuations  in  the  market  value 
or  arbitrary  changes  in  the  book  value  of  securities  or  other  property. 

(NoTiii. — Tkis  mlmg  has  teen  modified  in  the  case  of  securities 
(nv7ied  by  brokers  or  others  regularly  engaged  in  buying  and  selling 
securities.    See  T.  D,  2609.) 

81.  John  Doe,  while  driving  an  automobile,  ran  down  and 
injured  another  person.  He  either  paid  over  a  certain  sum, 
or  paid  a  judgment  rendered  against  him,  in  settlement  of 
the  injury  done.    Can  he  claim  the  amount  so  paid  as  a  loss? 

No.  It  was  not  a  loss  which  was  incurred  in  the  conduct  of  his 
business  or  trade,  or  which  resulted  from  a  transaction  entered  into 
t'or  profit. 

82.  How  am  I  to  determine  what  amount  of  los&,  resulting 
trom  a  sale  of  property,  is  allowable  as  a  deduction? 

The  same  method  of  computation  should  be  followed  as  is  outlined 
m  the  answer  to  the  twenty-sixth  question.  If  the  result  is  a  loss 
instead  of  a  gain,  that  loss  may  be  claimed  as  a  deduction,  if  it  was 
connected  with  your  regular  business  or  trade,  or  during  the  same 
year  you  derived  gains  from  other  transactions  entered  into  for  profit 
but  not  connected  with  your  regular  business  or  trade  in  excess  of 
the  amount  of  your  loss. 


V 


2 


INCOME  TAX  PRIMER. 


21 


83.  V/hat  is  the  difTercnce  between  the  losses  allowable 
as  deductions  under  the  provisions  of  the  fourth  paragraph 
of  section  5  of  the  act  of  September  8,  1916,  and  those  allow- 
able under  the  provisions  of  the  fifth  paragra  oh,  same  sec- 
tion? 

Losses,  for  income-tax  purposes,  are  divided  into  two  classes:  {a) 
Those  incurred  in  business  or  trade  and  (b)  those  resulting  from 
transactions  entered  into  for  profit  but  not  connected  with  the  tax- 
payer's regular  business  or  trade. 

For  example:  "A*'  is  repfularly  engaged  in  buying  improved  or 
unimproved  real  property  with  the  intention  of  selling  the  same  as 
early  as  possible  at  a  profit.  In  one  or  more  instances  the  property 
purchased  may  be  sold  at  a  loss,  and  that  loss  may  be  claimed  by  him 
as  a  deduction  under  the  pi-ovisions  of  the  fourth  paragraph  for  the 
reason  thai  he  is  regularly  engaged  in  buying  and  selling  real  estate. 
Now,  '*B"  buys  a  home  or,  perhaps,  he  buys  two  or  three  pieces  of 
proj)erty  in  the  cour-se  of  several  years.  He  is  not  regularly  engaged 
in  buying  and  selling  real  estate  and,  therefore  any  loss  he  may 
suffer  throuffh  such  a  transaction  can  onlv  be  claimed  bv  him  as  a 
deduction  under  the  provisions  of  the  fifth  paragraph  of  section  5; 
that  is,  only  so  much  of  his  losses  as  does  not  exce^^d  the  amount  of 
gain  or  profit  derived  during  the  same  year  from  other  transactions 
entered  into  for  profit,  but  not  connected  with  his  regular  business  or 
trade,  can  be  claimed.  If  "  B,"  in  1917,  sold  one  property  at  a  loss 
of  $2,000  and  another  property  at  a  gain  of  $1,000,  he  must  report 
the  gain  of  $1,000  under  "Gross  income,"  and  can  claim  only  that 
amount  as  a  loss. 

This  same  rule  is  applicable  in  the  case  of  losses  arising  from  pur- 
chases and  sales  of  stocks  and  bonds.  If  the  taxpayer  is  regularly 
engaged  in  buying  and  selling  such  securities,  any  loss  he  may  suffer 
may  be  claimed  under  the  provisions  of  the  fon^^th  paragraph.  If 
he  is  not  so  engaged  it  may  only  be  claimed  under  the  provisions  of 
the  fifth  paragraph. 

84.  In  computing  amount  of  profit  or  loss  resulting  from 
purchase  and  sale  of  securities  which  is  to  be  returned  or 
claimed  as  a  deduction  under  the  provisions  of  the  fifth  para- 
graph of  section  5  of  the  act  of  September  8,  1916,  is  interest 
or  dividends  received  on  the  securities  during  the  tax  year  to 
be  taken  into  consideration? 

No.  Interest  and  dividends  are  held  to  be  items  of  current  income, 
returnable  as  such,  and  they  are  not  to  be  considered  when  com- 
puting the  amount  of  profit  or  loss  which  results  from  a  purchase  and 
sale. 

85.  A  professional  man  or  a  merchant  owns  and  operates 
a  "  fancy  stock  farm.''  The  expenses  of  operation  exceed 
the  gross  receipts.  Can  the  difference  be  claimed  as  a  deduc- 
tion under  the  head  of  "  losses  "? 

No.  It  is  held  that  where  a  farm  is  operated  for  purposes  of 
recreation  or  pleasure,  and  not  primarily  for  profit,  but  as  a  hobby, 
that  farm  is  not  to  be  classed  as  a  commei-cial  enterprise,  that  it  does 
not  form  a  part  of  its  owner's  business  or  trade  and  until  it  is  placed 
upon  a  pront-paying  basis  the  gross  receipts  are  not  to  be  reported 


22 


INCOME   TAX  PRIMER. 


under  "  Gross  income  "  and  the  expenses  are  not  to  be  claimed  as  a 
deduction.  This  ruling,  of  course,  precludes  the  claiming  of  the 
difference  between  the  two  amounts  as  a  loss. 

86.  Suppose  I  buy  a  farm  which  is  much  run  down  with 
the  intention  of  making  it  a  profit-paying  property.  To  do 
this  I  am  obliged  to  expend  large  amounts  for  labor  in  clear- 
ing away  brush,  for  fertilizer,  lime,  etc.,  and  for  several 
years  the  expenses  will  greatly  exceed  the  gross  receipts. 
Can  the  excess  of  expenses  over  receipts  for  each  year  be 
claimed  as  a  loss? 

No.  The  amounts  so  expended  are  held  to  be  investments  of 
cai)ital,  the  result  of  which  is  an  improvement  or  betterment,  and, 
until  the  farm  becomes  a  paying  proposition,  no  portion  of  the  gross 
receipts  is  to  be  reported  as  income  and  no  portion  of  the  expenses 
can  be  claimed  as  a  deduction,  either  under  the  head  of  "Business 
expenses"  or  under  the  head  of  "Losses." 

This  same  ruling  is  equally  applicable  in  the  case  of  a  young 
orchard.  If,  after  the  farm  or  orchard  has  been  placed  upon  a  profit- 
paying  basis  a  bad  year  follows  and  a  loss  is  sustjiined  during  that 
year,  that  loss  may  be  claimed  as  a  deduction. 

87.  I  own  a  tract  of  timber  which  was  partially  destroyed 
by  fire  during  1917.     Is  this  loss  allowable  as  a  deduction? 

The  actual  amount  of  capital  invested  in  standing  timber,  if  ac 
quired  on  or  after  March  1,  1913,  and  later  destroyed  by  fire,  may  be 
claimed  as  a  deduction  if  not  reimbursed  by  insurance  or  otherwise. 
If  the  timber  was  acquired  prior  to  March  1,  1913,  its  fair  market 
price  or  value  as  of  that  date  may  be  claimed.  To  illustrate  the 
method  to  be  employed  in  computing  the  amount  of  loss  allowable  as 
a  deduction,  the  following  is  submitted:  A  tract  of  land  was  acquired 
prior  to  March  1,  1913,  and  the  estimated  amount  of  timber  standing 
on  that  tract  on  that  date  was  1,000,000  feet,  board  measure,  the  fair 
market  price  or  value  per  1,000  feet  established  by  the  current  prices 
prevailing  in  the  locality  of  the  tract  in  question  as  of  March  1,  1913, 
being  $4.  During  the  year  1917,  400,000  feet  of  this  timber  was  de- 
stroyed by  fire.  In  this  case  $1,600  is  the  amount  which  may  be 
claimed  as  a  deduction. 

88.  If  cattle  or  other  live  stock  are  produced  on  a  farm 
which  I  own  or  operate,  and  are  then  lost  through  disease, 
may  I  claim  their  value  at  the  time  of  death  as  an  allowable 
deduction? 

No.  If  the  stock  which  died  was  purchased  and  the  cost  has  not 
been  claimed  in  a  previous  return  as  a  deduction,  that  cost  may  be 
claimed  as  a  deduction  in  your  return  rendered  for  the  year  during 
which  the  loss  occurred. 

89.  If  a  crop  which  is  ready  to  be  harvested,  but  has  not 
been  gathered,  or  a  crop  which  has  been  harvested,  but  has 
not  been  sold,  is  destroyed  by  storm,  flood,  or  fire,  can  the 
value  of  that  crop  be  claimed  as  a  deduction? 

No.  It  is  understood,  of  course,  that  the  actual  cost  of  producing 
or  harvesting  a  crop  which  has  been  so  destroyed  may  be  claimed  as 
a  deduction  under  the  head  of  Business  expense. 


INCOME   TAX  PKIMEB. 


23 


90.  What  conditions  are  necessary  in  order  that  a  debt  may 
be  claimed  as  a  deduction? 

It  must  be  (a)  a  bona  fide  debt,  (h)  definitely  ascertained  to  be 
worthless  and  uncollectible  during  the  year  for  which  the  deduction 
is  claimed,  and  (c)  if  books  are  kept  it  must  be  charged  off  within  the 
year  for  which  the  deduction  is  claimed  and  no  longer  considered  an 
asset  or  carried  as  such  on  the  books. 

91.  In  1917  a  corporation  or  a  firm  to  which  I  had  loaned 
money  became  bankrupt.  Can  this  debt  be  considered  abso- 
lutely worthless  and  claimed  as  a  deduction  for  1917? 

No,  unless  the  affairs  of  the  debtor  have  been  finally  adjusted,  its 
assets  sold  for  the  benefit  of,  or  distributed  to,  its  creditors,  and  its 
receivpT  in  baukniptcy  discharged.  If  all  this  has  occurred  during 
the  year  1917,  so  much  of  the  debt  as  remains  unpaid  after  the  receiver 
is  discharged  may  be  claimed  as  a  deduction  for  the  year  1917. 

92.  Is  it  absolutely  necessary  that  the  debtor  corporation 
or  firm  mentioned  in  the  ninety-first  inquiry  be  declared  a 
bankrupt  ai)d  its  receiver  discharged  before  I  can  claim  a 
deduction  on  account  of  the  debt  in  question? 

No.  If  the  debtor  corporation  has  no  assets  whatsoever,  and  it  is 
definitely  known  that  nothing  whatsoever  cjin  be  collected  from 
debtor  itself  or  any  person  connected  with  it,  a  creditor  need  not  go 
to  the  expense  of  instituting  bankruptcy  proceedings  in  order  to 
establish  his  right  to  claim  the  worthless  debt  as  a  deduction. 

93.  *'A''  indorses  a  note  for  '*  B."  The  latter  has  since  de- 
parted for  parts  unknown  and  the  note  became  due  in  1917, 
and  '*A^'  was  required  to  make  good  his  indorsement.  Can 
he  now  claim  as  a  deduction  the  amount  paid  by  him  to  the 
creditor? 

Yes.  If  lie  has  no  knowledge  of  "  B's  "  prosent  whereabouts  and 
has  good  reason  to  believe  that  he  is  possessed  of  no  assets  and  that 
it  is  his  intention  never  to  make  payment  of  it,  the  ariount  so  paid 
by  "A"  may  be  considered  a  bad  debt  due  him  from  "  B." 

94.  If,  on  account  of  friendship  or  relationship  I  advanced 
a  certain  sum  to  assist  a  needy  friend  or  relative,  and  at 
the  time  such  advance  was  made  I  had  little  or  no  reason  to 
expect  that  the  amount  so  advanced  would  every  be  returned, 
may  I  now  claim  a  deduction  to  cover  such  advance? 

No.  Such  an  advance,  partaking,  as  it  does,  somewhat  of  the 
nature  of  a  philanthropic  donation  or  a  good-will  offering,  is  not 
held  to  constitute  a  bona  fide  debt. 

95.  In  rendering  my  1914  return  I  claimed  a  deduction 
to  cover  a  debt  I  then  believed  to  be  absolutely  worthless. 
In  1917  the  debtor  has  discharged  part  of  his  obligations. 
How  should  I  treat  this  payment  for  income-tax  purposes? 

Consider  it  as  an  item  of  income  and  include  this  amount  under 
"Gross  income"  in  vour  1917  return. 

96.  A  professional  man  earned  a  fee  in  1916.  As  he  keeps 
no  bookS;  he  reports  his  income  for  tax  purposes  on  an  actual 


24 


INCOME   TAX   PRIMER. 


INCOME   TAX  PBIMEE. 


25 


receipt  basis.    As  this  fee  has  never  been  reported  as  income, 
can  it  be  claimed  as  a  deduction  if  collection  can  not  be  made? 
No;  never  havirigr  been  returned  as  income,  it  can  not  be  claimed 
as  a  deduction. 

97.  ^'A''  loaned  "  B  ''  $10,000,  the  debt  being  secured  by 
a  mortgage  on  a  farm.  Foreclosure  proceedings  were  re- 
sorted to  and  "A,-*  to  protect  his  interests,  purchased  the 
farm  for  $8,000.  Can  the  difference  between  these  two 
amounts  be  claimed  as  a  deduction? 

Where,  under  foreclosure,  the  mortgagee  buys  in  the  mortgaged 
property,  the  difference  between  the  purcliase  price  and  tlie  debt  will 
not  be  allowed  as  a  deduction.  The  property  which  was  security  for 
the  debt  being  in  the  possession  and  ownership  of  the  mortgagee,  is, 
for  purposes  of  the  income  tax,  held  to  be  sufficient  to  justify  the  dis- 
allowance of  a  claim  for  bad  debts.  Where  the  purchaser  of  the 
property  upon  foreclosure  is  another  than  the  mortgagee,  the  latter 
may  claim  the  dilference  between  the  amount  of  the  debt  and  the  net 
amount  paid  to  the  mortgagee  as  a  bad  debt. 

98.  ^^A"  claimed  that  "  B  ''  owed  him  $1,000.  "  B  ''  con- 
tested the  claim,  but  agreed  to  pay  $500  in  compromise. 
May  "A''  claim  as  a  deduction  the  balance  which  he  con- 
tended was  due  him? 

No.  Where  an  indebtedness  is  claimed,  contested,  and  a  settlement 
is  had  b}^  way  of  compromise,  whereby  an  amount  less  than  the  debt 
claimed  is  accepted  in  full  payment,  the  dilference  between  the 
amount  claimed  and  the  amount  paid  can  not  be  claimed  as  a  de- 
duction. 

DEPRECIATION. 

99.  At  what  rates  may  depreciation  be  claimed  and  under 
what  conditions? 

As  the  rate  at  which  depreciation  may  be  claimed  is  dependent,  in 
a  gi'eater  or  less  extent,  upon  local  conditions,  the  use  to  Avhich  the 
property  is  put,  and  its  probable  lifetime  under  normal  l)usiness  con- 
ditions.no  specific  rates  at  which  it  may  be  claimed  have  ever  been 
established.  The  law  states  that  a  "reasonable  allowance"  may  be 
claimed  and  it  is  for  the  taxpayer  to  determine  what  constitutes  a 
"  reasonable  allowance."  To  compute  the  amount  \yhich  may  be 
claimed,  a  taxpayer  should  determine  the  probable  lifetime  of  the 
property,  then  divide  its  cost  to  him  by  the  number  of  years  it  will  be 
usable  in  a  business  in  which  employed,  and  the  result  thus  obtained 
will  represent  the  amount  which  may  be  claimed  each  year  as  a  de- 
duction, e.  g.,  a  frame  building,  the  probable  lifetime  of  which,  with- 
out repair  or  replacement,  is  25  years,  cost  $5,000.  Divide  $5,000  by 
25  and  claim  $200  each  year  as  depreciation. 

While  each  taxpayer  must  determine  the  probable  lifetime  of  his 
property  without  regard  to  the  following  figures,  it  has  been  estimated 
that  the  average  usable  lifetime  of  a  frame  building  is  25  years ;  a  brick 
building,  35  years ;  a  stone  building  or  a  steel  and  concrete  building, 
50  to  100  years.  The  estimated  lifetime  of  ordinary  machinery  is  10 
years,  that  of  automobiles  used  for  business  or  farm  purposes  and 
farm  tractors,  4  to  5  years. 


'I; 


■■i; 


If  a  taxpayer  wishes  to  claim  the  full  amount  of  depreciation  esti- 
mated to  have  occurred  in  the  value  of  a  building  or  other  property 
used  for  business  or  trade  purposes,  he  may  do  so,  but  this  precludes 
his  claiming  a  deduction  to  cover  any  amount  expended  during  the 
same  year  in  making  repairs.  If  he  wishes  to  claim  a  deduction  on 
account  of  repairs,  their  cost  must  be  deducted  from  the  full  amount 
of  depreciation,  and  the  balance  may  then  be  claimed  as  a  deduction 
under  the  heading  of  "Depreciation";  that  is,  if  the  taxpayer  ex- 
pends $100  in  making  repairs  to  a  building  which  will  depreciate  in 
value  $200  during  the  calendar  year  he  may  claim  $100  as  a  business 
expense  and  $100  as  depreciation,  or  he  may  claim  $200  as  deprecia- 
tion and  nothing?  for  repairs.  In  short,  the  aggregate  deductions 
claimed  on  account  of  repairs  and  depreciation  must  not  exceed  the 
full  amount  of  depreciation  estimated  to  have  occurred. 

(Note. — The  repairs  referred  to  in  this  paragraph  are  such  as  are 
general  in  character,  represent  replacements,  etc.  Small  items,  such 
as  replacement  of  broken  window  panes,  papering,  minor  repairs, 
etc.,  are  allowable,  even  though  full  amount  of  depreciation  has  l^een 
claimed.) 

In  claiming  depreciation  the  following  fundamental  principles 
nwut  be  taken  into  consideration: 

(a)  Only  such  depreciation  as  results  from  exhaustion,  wear,  and 
tear  of  property,  arising  out  of  its  use  or  employment  in  business  or 
trade,  can  be  claimed.  Depreciation  in  the  value  of  a  home  or  any 
article  of  property,  such  as  automobiles,  used  for  personal  pleasure 
or  convenience,  can  not  be  claimed ;  the  property  must  be  used  for  the 
purpose  of  producing  income. 

(b)  Depreciation  other  than  that  arising  from  wear  and  tear,  such 
as  a  lessening  of  values  due  to  changes  in  the  social  or  business  condi- 
tions in  the  neighborhood  in  which  a  property  is  located,  changes  of 
street  grade,  or  fluctuations  in  market  values,  etc.,  can  not  be  claimed. 

{c)  Depreciation  in  the  value  of  land,  whether  improved  or  unim- 
proved, due  to  ordinary  erosion,  exhaustion,  or  any  other  cause  can 
not  be  claimed. 

(d)  Where  the  value  of  a  piece  of  machinery  or  any  other  asset  i3 
lessened  by  reason  of  the  production  of  an  improved  machine  or  ar- 
ticle, that  depreciation  can  not  be  claimed,  as  it  does  not  result  from 
exhaustion,  wear,  and  tear. 

(e)  Where,  in  the  course  of  years,  the  owner  of  property  has 
claimed  its  full  cost  as  depreciation  in  his  income-tax  returns,  no  fur- 
ther claim  wull  be  allowed. 

(/)  The  value  to  be  cared  for  by  depreciation  is  the  actual  amount 
invested  in  the  property  and  not  the  value  which  may  be  arbitrarily 
or  otherwise  fixed. 

100.  A  store  or  other  building  has  outlived  its  usefulness; 
the  owner  tears  it  down  to  make  room  for  a  building  of  an 
improved  type.  Can  the  value  of  the  old  building  at  the  time 
of  destruction  be  claimed  as  depreciation  or  as  a  loss? 

No.  Losses  due  to  the  voluntary  removal  or  destruction  of  build- 
ings, etc.,  incident  to  improvements  are  either  a  proper  charge  to  the 
cost  of  new  additions  or  to  depreciation  already  provided,  as  the  facts 
may  indicate,  but  in  no  case  is  it  a  proper  deduction  in  determining 


26 


INCOME   TAX  PRIMER, 


net  incomo.  If,  bovvever,  a  building  is  destroyed  prior  to  the  close 
of  its  lifetime,  as  estiinated  for  the  purpose  of  making  depreciation 
cbarges.  that  portiori  of  its  cost  which  is  properly  chargeable  to  the 
period  it  might  liavc  remained  in  a  usable  condition  may  be  consid- 
ered a  part  of  the  cost  of  the  new  building  when  computing  the 
amount  of  the  gain  or  profit  derived  from  a  sale  of  the  latter. 

101.  If  the  authorities  of  a  municipality  declare  that  a 
building  is  unsanitary  or  unsafe  for  the  purposes  to  which 
put  and  its  destruction  is  ordered,  can  the  losses  sustained 
by  the  owner  be  claimed  as  a  deduction? 

No;  neither  as  a  loss  nor  as  depreciation. 

102.  I  bought  a  patent  for  $5,000  which,  under  the  patent 
laws  of  the  United  States,  had  five  years  yet  to  run.  As  the 
value  of  this  patent  depreciates  each  year  on  account  of  the 
exhaustion  of  the  patent  period,  may  a  deduction  be  claimed? 

Yes.  The  cost  of  the  patent  divided  by  the  number  of  years  it  has 
yet  to  run,  yields  an  amount  which  may  be  claimed  each  year  as  de- 
preciation.   In  your  case  this  amount  is  $1,000. 

103.  I  understand  that  depreciation  in  the  value  of  articles 
for  personal  use  can  not  be  claimed  as  a  deduction.  How- 
ever, as  actors  and  actresses  are  often  required  to  furnish 
their  own  wardrobes,  does  not  the  depreciation  in  the  value 
of  such  property  constitute  an  allowable  deduction? 

If  costumes  purchased  by  members  of  the  theatrical  profession  are 
used  exclusively  for  the  production  of  a  play  and  are  not  adapted  for 
occasional  personal  use,  and  are  not  so  used,  a  deduction  may  be 
claimed  on  account  of  such  depreciation  in  their  value  as  occui-s  dur- 
ing the  year  on  account  of  wear  and  tear  arising  from  their  use  in 
the  production  of  the  play  or  from  their  becoming  obsolete  at  the 
close  of  the  production. 

DEPLETION. 

104.  Under  what  conditions  and  at  what  rates  may  deple- 
tion due  to  the  removal  of  a  natural  product  from  oil  or  gas 
wells,  mines  J  quarries,  etc.,  be  claimed? 

Paragraph  8  of  section  5  of  the  act  of  September  8,  1916,  as 
amended  by  the  war-revenue  act  of  October  3,  1917,  states  how  the 
amount  of  depletion  allowable  as  a  deduction  is  to  be  ascertained, 
but  as  so  many  factors  are  to  be  considered  in  computing  depletion, 
an  answer  which  will  be  applicable  in  all  cases  where  depletion 
occurs  can  not  here  be  given.  Such  factors  are  covered  in  consid- 
erable detail  by  Treasury  Decisions  2446  and  2447  and  the  Regula- 
tions, copies  of  which  may  be  obtained  from  the  collector  of  internal 
revenue  for  your  district,'and  where  thesa  Decisions  and  Regulations 
do  not  afford  all  the  information  necessary  in  your  particular  case 
a  detailed  statement  covering  all  the  facts  and  figures  in  your  case 
should  be  forwarded  to  the  collector,  with  a  request  for  a  ruling. 

CONTRIBUTIONS   AND   GIFTS   TO   RELIGIOUS,   CHARITABLE,   AND 

SCIENTIFIC  ORGANIZATIONS,  ETC. 

105.  With  reference  to  the  ninth  paragraph  of  section  5 
of  the  act  of  September  8,  1916,  as  amended,  how  am  I  to 


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INCOME   TAX  PRIMEE. 


27 


determine  to  what  extent  contributions  or  gifts  made  to  cor- 
porations or  associations,  organized  exclusively  for  religious, 
charitable,  scientific  or  educational  purposes,  societies  for  the 
prevention  of  cruelty  to  children  or  animals,  may  be  claimed 
as  a  deduction? 

You  should  first  ascertain  what  your  taxable  net  income  would  be 
were  you  not  entitled  to  a  deduction  on  account  of  contributions  or 
gifts  made  to  such  corporations,  associations,  or  societies,  and  then 
if  the  aggregate  of  your  contributions  and  gifts  made  during  the 
year  to  such  organizations  does  not  exceed  15  per  cent  of  your  taxable 
net  income  so  computed  their  aggregate  amount  may  be  entered  in 
the  space  provided  therefor  under  "  General  deductions "  on  a  per- 
sonal return  form.  If  such  aggregate  amount  exceeds  15  per  cent 
of  your  taxable  net  income  so  computed,  the  excess  can  not  be  claimed. 

For  example:  Your  total  taxable  net  income  amounts  to  $20,000. 
During  the  year  you  have  contributed  to  the  National  Red  Cross 
$1,000.  to  the  Young  Men's  Christian  Association  $1,000,  toward  the 
construction  of  a  new  church  $1,000,  and  to  the  Associated  Charities 
of  your  home  city  $500,  a  total  of  $3,500.  Fifteen  per  cent  of  your 
total  net  income  amounts  to  $3,000,  therefore  this  latter  amount  may 
be  claimed  as  a  deduction  and  the  balance  of  your  contributions  and 
gifts  may  not  be  claimed. 

In  clamiing  a  deduction  on  account  of  such  contributions  or  gifts 
there  should  be  shown  on  the  return  of  income  (a)  the  name  and 
address  of  each  organization  to  which  a  contribution  or  gift  was 
made  and  (h)  the  date  and  amount  of  each  such  contribution  or  gift. 

Where  the  contribution  or  gift  was  other  than  money  the  basis 
for  calculation  of  its  value  shall  be  the  fair  market  value  of  the 
property  given  at  the  time  of  contribution  or  gift. 

106.  During  1917  I  contributed  $100  toward  the  support 
of  a  needy  family.  May  this  contribution  be  claimed  as  a 
deduction? 

Contributions  or  gifts  made  to  individuals  do  not  constitute  allow- 
able deductions. 

PARTNERSHIPS. 

107.  Are  partnerships  subject,  as  such,  to  the  Federal  in- 
come tax  and  required  to  render  annual  income-tax  returns? 

No.  Section  8  {e)  of  the  act  of  September  8,  1916,  as  amended  by 
section  1204  of  the  war-revenue  act  provides  that : 

Persons  carryin^j  on  business  in  partnership  shall  be  liable  iov  income  tax 
only  in  their  individual  capacity,  and  the  share  of  the  profits  to  which  a  partner 
would  be  entitled  if  the  same  were  divided,  whether  divided  or  otherwise,  shall 
be  returned  for  taxation  and  the  tax  paid  under  the  provisions  of  this  title. 

This  section  further  states  how  the  distributive  share  of  partner- 
ship earnings  or  profits,  which  is  taxable  in  the  hands  of  the  indi- 
vidual member,  is  to  be  ascertained. 

While  annual  returns  are  not  required  of  a  partnership  for  income- 
tax  purposes,  the  Commissioner  of  Internal  Kevenue  or  any  district 
collector  is  authorized  to  request  at  any  time  that  a  true  and  accurate 
return  of  a  partnership's  earnings,  profits,  and  income  shall  be  made, 
excepting  only  the  income  which  is  exempt  ffom  taxation  under  the 


28 


INCOME   TAX  ITRIMEB. 


provisions  of  section  4  of  the  act  of  September  8,  1010,  as  amended, 
which  income  is  specified  in  the  answer  to  the  eighteenth  question. 
The  required  return  shall  set  forth  all  the  items  of  '*  Giioss  income'" 
and  general  deductions,  and  the  names  and  addresses  of  the  indi 
viduals  who  would  be  entitled  to  the  net  earnings,  profits,  or  income, 
if  distributed,  and  the  distributive  share  of  each. 

It  is  held  thnt  the  income  from  a  f)aitnership  accrues  to  the  indi- 
vidual partner  at  the  time  his  distributive  interest  is  determined  and 
reducible  to  possession.  In  the  returns  of  income  made  by  indi- 
viduals for  the  calendar  year,  therefore,  there  should  be  inchided  such 
income  accruing  from  the  business  of  the  partnership  for  its  busi- 
ness oi'  fiscal  year  as  may  have  been  definitely  aiic.ertained  by  uieans  of 
a  book  bahince,  whether  distributed  or  not.  In  other  words,  mem- 
bers of  partnership's  are  required  to  make  retui-ns  of  income  like  other 
individuals  for  the  calendar  vear,  and  should  include  in  th^'ir  returns 
the  net  proceeds  of  their  interests  in  partnership  profiis  ascertained 
at  the  end  of  the  l)usiness  vear  fallincr  within  the  calendar  vear  for 
which  the  individual  return  is  being  tendered. 

All  domestic  partnerships  having  a  net  income  of  $0,000  or  more 
for  1917,  or  any  subsequent  year,  are  required  to  render  excess-profits 
tax  returns. 

108.  A  partnership  was  organized  in  July,  1913,  and  in 
1917  one  of  its  individual  members  sold  his  interest  therein 
and  retired.  How  is  he  to  determine  the  an*  ount  of  gain  or 
profit  derived  from  the  transaction  which  is  returnahle  for 
income-tax  purposes? 

From  the  selling  price  should  be  deducted  the  amount  of  capital  he 
has  actually  invested  in  the  partnership's  assets  and  the  difference 
reported  under  "  (iross  income." 

109.  What  forms  of  income,  if  any,  are  subject  to  with- 
holding of  tax  at  the  source  when  paid  to  a  partnership? 

As  the  income  received  by  a  partnership  is  not  subject  to  income 
tax  in  the  hands  of  the  partnership,  no  tax  is  to  be  withheld  from 
income  paid  to  a  partnershij),  either  domestic  or  foreign. 

FIDUCIARIES. 

110.  Who  are  classed  as  fiduciaries? 

The  term  "  fiduciary  "  is  one  that  applies  to  all  persons  or  corpora- 
tions that  occupy  positions  of  peculiar  confidence  toward  others, 
such  as  trustees,  executors,  or  administrators,  and  a  fiduciary  for  in- 
come-tax pur^)oses  is  any  person  or  corporation  that  holds  in  trust 
r.n  estate  of  another  person  or  i)ersons. 

There  may  be  fiduciary  relationship  between  an  agent  and  the  nrin- 
ipal,  but  the  word  "  agent "  d(jes  not  denote  a  "  fiduciary  "  within 
the  meaning  of  the  income-tax  law. 

A  fiduciary  relationship  for  the  purposes  of  the  income  tax  can  not 
be  created  by  a  power  oi  attorney.  An  agent  having  entire  charge 
of  property,  without  authority  to  effect  and  execute  leases  with  ten- 
ants entirely  on  his  own  responsibility,  and  without  consulting  prin- 
cipal, paying  taxes  and  expenses  and  all  other  charges  in  connection 
with  the  property  out  of  funds  in  his  hands  from  collections  of  rents, 


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INCOME   TAX    PRIMER. 


29 


merely  turning  over  the  net  profits  from  the  pre  porty  periodically 
to  his  principal  by  virtue  of  authority  conferred  upon  him  by  power 
of  attorney,  is  not  a  "fiduciary"  within  the  meaning  of  the  income- 
tax  law.  In  all  cases  where  no  legal  trust  bus  been  created  in  the 
estate  controlled  by  the  agent  and  attorney  the  liability  under  the 
law  rests  with  the  principal. 

A  deed  of  trust  must  be  absolute  so  far  as  the  conveyance  of  title 
is  concerned,  and  irrevocable  by  the  donor.  Otherwise  the  income 
from  the  property  in  question  will  be  held  for  income-tax  purposes 
to  accrue  to  the  donor  and  must  be  accounted  for  by  him. 

111.  Is  the  duly  appointed  guardian  of  a  minor,  or  the 
conservator  of  an  estate  of  an  incompetent  person,  required 
to  render  personal  returns  for  and  in  behalf  of  his  ward? 

Yes,  under  the  same  conditions  as  would  the  ward  if  competent 
to  act  for  himself,  and  in  so  doing  the  personal  exemption  to  which 
the  ward  is  entitled  may  be  claimed. 

112.  Is  the  duly  appointed  administrator  of  an  estate  of 
a  deceased  person,  who  died  during  the  tax  year,  required  to 
render  a  personal  retvirn  for  and  in  behalf  of  the  deceased, 
and  also  his  estate? 

If  the  net  income  of  the  deceased  from  January  1  of  the  year  dur- 
ing which  he  died  to  the  date  of  his  death  equaled  or  exceeded  $1,000, 
in  the  case  of  an  unmarried  person,  or  $2,000  in  the  case  of  a  married 
person,'  the  administrator  should  file  a  personal  return,  executed  on 
Form  1040,  for  and  in  behalf  of  the  deceased,  and  a  return  executed 
on  the  same  form  will  also  be  required  of  him  for  and  in  behalf  of 
the  estate,  if  it  remainfi  m  process  of  administration  and  its  net 
income  from  the  date  of  the  decedent's  death  to  December  31  equals 
or  exceeds  $1,000. 

The  administrator  will  be  required  to  pay  and  will  be  held  liable 
for  any  amount  of  tax  which  may  be  assessed  against  any  such 
return  rendered  by  him. 

113.  Is  the  trustee  having  charge  of  a  trust  estate,  the 
net  income  of  which  is  regularly  distributed  among  the  bene- 
ficiaries, required  to  render  a  return? 

Yes;  if  any  one  of  the  beneficiaries  is  unmarried  and  his  or  her 
distributive  interest  in  the  net  income  of  the  trust  equals  or  exceeds 
$1,000.  Yes,  also,  if  all  the  beneficiaries  are  married  and  the  dis- 
tributive interest  of  any  one  equals  or  exceeds  $2,000.     Othenvise,  no. 

It  should  be  understood,  however,  that  this  answer  is  applicable 
only  in  a  case  where  all  the  beneficiaries  are  citizens  or  residents  of 
the  United  States.  If  any  portion  of  the  net  income  of  an  estate  or 
trust  is  distributed  to  a  nonresident  alien  beneficiary  a  return  is  . 
required,  and  the  normal  income  tax  of  2  per  cent  is  to  be  deducted 
and  withheld  from  so  much  of  the  amount  remitted  to  such  bene- 
ficiaries as  was  not  derived  from  dividends  or  from  the  net  earnings 
of  corporations,  joint-stock  companies,  etc.,  subject  to  a  like  tax,  or 
has  been  subject  to  the  withholding  of  the  normal  tax  at  the  source. 

114.  In  a  case  where  an  estate  is  in  process  of  administra- 
tion and  the  fiduciary  renders  returns  covering  the  income 
and  deductions  of  the  estate,  and  pays  the  amount  of  normal 


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INCOME   TAX  PRIMEIL 


and  additional  tax  assessed  thereon,  will  the  net  income  be 
subject  to  tax  in  the  hands  of  the  beneficiaries  when  received 
by  them? 

No.  The  estate  cliirino-  fidministration  is  helrl  to  be  a  taxable 
entity;  the  fiduciary  having  it  in  charge  is  required  to  render  returns 
and  pay  the  taxes  assessed  thereon,  and,  these  taxes  having  once  been 
paid,  such  income  is  exempt  from  tax  in  the  hands  of  the  beneficiaries 
who  receive  the  same. 

The  income  of  estates  in  process  of  administration  or  in  trust  for 
accumuhuion  of  income  is  taxed  as  for  an  unmarried  person. 

115.  Is  any  other  than  a  return  of  income  required  of  a 
fiduciary? 

Yes.  Fiduciaries  come  within  the  provisions  of  section  28  of  the  act 
of  September  8,  lOlO,  as  amended  l)y  section  1211  of  the  wai'-revenue 
act,  and  will  be  required  to  render  to  the  Commissioner  of  Internal 
Revenue  a  return  of  information,  if,  during  the  tax  yt^ar.  any  income 
has  been  paid  to  an  indivnlual.  partnership,  corporation,  joint-stock 
company,  etc.,  equal  to,  or  in  excess  of,  $800. 

116.  Is  a  fiduciary  required  to  deduct  and  withhold  at  the 
source  any  amount  of  normal  income  tax? 

Yes.  If  any  distribution  or  payment  of  fixed  or  determinable 
gain,  profit,  or  income  is  made  to  a  nonresident  alien  iridividual  2  per 
cent  is  to  be  deducted  and  withheld. 

117.  Is  an  ancillary  administrator  required  to  render 
income-tas  returns  covering  income  received  by  him? 

An  ancillary  administi-ator  is  held  to  be  merely  the  agent  of  the 
domiciliary  administrator.  The  former  should  transmit  to  the  latter 
all  information  as  to  income  received  by  him  in  order  tiuit  the  domi- 
ciliary administrator  may  make  a  return  covering  the  entire  income 
of  the  estate. 

118.  Have  the  beneficiaries  cf  an  estate  or  trust  a  right  to 
inspect  income-tax  returns  rendered  by  a  fiduciary  covering 
the  income  of  the  estate  or  trust  in  which  they  are  interested'^ 

An  executor,  administrator,  or  trustee  acts  for  his  principal,  and 
not  for  the  beneficiaries  of  the  estate  of  his  principal ;  therefore, 
beneficiaries  are  not  entitled,  as  such,  to  an  inspection  of  returns  of 
income  filed  by  such  a  fiduciary. 

119.  Who  is  liable  for  payment  of  the  tax  assessed  against 
the  net  income  of  an  estate  or  trust? 

Liability  for  payment  of  the  income  tax  attaches  to  the  person  of 
the  fiduciary  up  to  and  including  the  date  of  his  discharge. 

120.  I  act  as  trustee  of  a  trust  estate.  A  part  of  the  net 
income  v/liich  accrues  to  the  trust  is  retained  and  becomes 
a  part  of  the  corpus  of  the  trust  estate.  Am  I  required  to 
render  a  return  for  and  in  behalf  of  the  trust  other  than  the 
fiduciary  return  required  of  me? 

If  the  trust  itself  is  named  as  a  beneficiary  and  the  amount  of  net 
income  which  accrues  to  it  as  a  beneficial^  equals  or  exceeds  $1,000, 
a  return  executed  on  Form  1040,  for  and  in  behalf  of  the  trust,  in 
addition  to  the  return  executed  on  Form  1041,  is  required. 


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INCOME   TAX  PRIMER. 


31 


121.  May  an  executor  or  administrator  render  his  fiduciary 
returns  prior  to  the  close  of  the  calendar  year  in  a  case  where 
the  estate  is  finally  distributed  and  he  is  discharged  from 
and  relieved  of  his  trust  during  that  year? 

An  administrator  or  executor  may,  immediately  after  his  dis- 
charge upon  final  accounting,  file  with  the  proper  collector  of 
internal  revenue  a  return  covering  the  income  and  deductions  of  the 
estate  for  the  period  January  1,  to  the  date  of  his  discharge.  To  such 
a  return  there  should  be  attached  a  certificate,  under  seal,  setting 
forth  the  fact  of  the  final  accounting  and  discharge  of  the  adminis- 
trator or  executor,  and  the  tax  assessed  against  that  return  may  be 
paid  immediately  after  receipt  from  the  collector  of  a  notice  of  the 
amount  assessed  and  a  demand  therefor. 

122.  An  individual,  now  deceased,  held  a  life  insurance 
policy  in  which  his  estate  was  named  as  the  beneficiary.  Are 
the  proceeds  of  this  policy  subject  to  income  tax? 

The  proceeds  of  life  insurance  policies  payable  to  the  estate  of  the 
decedent,  when  received  by  his  executor  or  administrator,  axe,  in 
the  amount  by  wliich  such  proceeds  exceed  the  premium  or  premiums 
paid  by  the  decedent,  income  to  the  estate  and  are  to  be  accounted 
for  by  the  executor  or  administrator. 

123.  Where,  in  the  case  of  more  than  one  trust,  the  creator 
in  each  instance  is  the  same  person,  and  the  trustee  in  each 
instance  is  the  same,  how  will  the  trustee  account  for  the 
income  of  the  several  trusts? 

The  trustee  should  make  a  single  return  on  Form  1041  for  all  the 
trusts  in  his  hands,  notwithstanding  the  fact  that  they  arise  from 
different  instruments.  When  a  trustee  holds  trusts  created  by  differ- 
ent persons  for  the  benefit  of  the  same  beneficiary  he  should  make 
return  for  each  trust  separately  on  Form  1041.  This  ruling  is  based 
on  the  identity  of  the  creator  and  the  identity  of  the  trustee  of  the 
various  trusts  and  not  upon  the  identity  of  the  beneficiary. 

124.  May  the  expenses  of  administration  of  an  estate  be 
claimed  by  the  fiduciary  as  deductions  in  computing  the 
estate's  liability  for  income  tax? 

Expenses  of  administration,  such  as  court  costs,  attorneys'  fees, 
executor's  commissions,  etc.,  are  chargeable  against  the  corpus  of  the 
estate  and  are  not  allowable  as  deductions  to  the  estate  or  the  bene- 
ficiaries thereof. 

125.  May  a  fiduciary  claim  as  a  deduction  the  amount  of 
depreciation  estimated  to  have  occurred  in  the  value  of  prop- 
erty owned  by  the  estate? 

In  the  case  of  a  trust  estate  where  the  terms  of  the  will  or  trust, 
or  the  decree  of  a  court  of  competent  jurisdiction  provides  for  keep- 
ing the  corpus  of  the  estate  intact,  and  where  physical  property  form- 
ing a  part  of  the  corpus  of  such  estate  has  suffered  depreciation 
through  its  employment  in  business,  a  deduction  from  gross  income 
for  the  purpose  of  caring  for  this  depreciation,  where  the  deduc- 
tion is  applied  or  held  by  the  fiduciary  for  making  good  such  depreci- 
ation, may  be  claimed  by  the  fiduciary  in  his  return  of  income. 


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INCOME   TAX  PRIMER. 


Fidnciaiios  when  making  such  a  claim  should  set  forth,  in  con- 
nection with  thfir  returns,  the  provisions  of  law,  trust,  or  decree  re- 
quiring- sucli  d(^prcciation  deduction  where  any  exists,  or  when  actual 
depreciation  occurs,  the  amount  thereof,  and  that  the  same  has  been 
or  will  be  i)resorvod  and  applied  as  such.  xVll  amounts  paid  by  fidu- 
ciaries to  beneficiaries  of  trust  estates  from  income  of  sucli  trust 
estates,  whetlier  froui  reserves  or  otherwise,  are  held  to  be  distribu- 
tions of  income,  and  will  be  treated  for  income-tax  purposes  in 
accordance  with  the  in'ovisions  of  law  and  regulations  applicable  to 
the  income  oi'  such  beneficiaries. 

126.  What  returns  are  required  from  a  fiduciary  in  the 
United  States  where  the  beneficiaries  of  the  trust  are  non- 
resident alien  individuals? 

Where  a  fiduciary  in  tlie  United  States  is  the  recipient  of  trust  in- 
come foT-  which  there  is  but  one  beneficiary,  and  that  beneficiary  a 
nonresident  alien,  the  fiduciary  will  be  required  to  make  full  and 
complete  return  on  income-tax  Form  1040  or  1040  A,  as  the  case  may 
be,  for  this  trust  income  on  l)ehalf  of  the  nonresident  alien  and  pay 
any  and  all  tax  shoAvn  by  such  return  to  be  due.  Where  tliere  are 
two  or  more  beneficiaries,  one  or  all  of  whom  are  nonresident  aliens, 
the  fiduciary  shall  render  a  return  on  Form  1041  for  and  in  behalf  of 
Ihe  trust  estate  and  a  ])ers<inal  return  on  Form  1040  or  1040  A  for  each 
nonresident  alien  beneficiary. 

WITHHOLDING  OF  TAX. 

127.  At  what  rates  and  from  what  income  is  the  normal 
income  tax  now  to  be  deducted  and  withheld  at  the  source? 

All  persons,  corporations,  partnerships,  associations,  or  insurance 
companies  paying  any  amount  of  fixed  or  determinable  gain,  profit, 
or  income,  other  than  that  paid  as  dividends  on  tlie  capital  stock  or 
from  the  net  earnings,  profits,  or  income  of  corj^orations,  joint-stock 
companies,  etc.,  subject  to  a  like  tax,  to  a  nonresident  alien  individual, 
are  required  to  deduct  and  witiihold  normal  tax  at  the  rate  of  2  per 
cent  from  the  entire  amount  paid. 

Normal  income  tax  at  the  rate  of  6  i)er  cent  is  to  be  witliheld  from 
all  payments  of  interest  upon  bonds,  mortgages,  deeds  of  trust,  or 
other  similar  obligations  of  domestic  or  other  resident  corporations, 
joint-stock  companies,  associations,  or  insurance  companies,  when 
paid  to  foreign  corporatious,  joint-stock  companies,  associations,  or 
insurance  companies  haviiig  no  vofHce  or  place  of  business  in  the 
United  States. 

When  dividends  are  ])aid  upon  the  capital  stock  or  from  the  net 
earnings  of  domestic  or  <  ther  resident  corporations,  joint-stock  com- 
panies, associations,  or  insurance  comjianies,  to  foreign  corporations, 
joint-stock  companies,  etc.,  liaving  no  office  or  place  of  business  in 
the  United  States,  normal  tax  at  the  rate  of  2  per  cent  is  to  be  with- 
held. 

No  amount  of  tax  is  to  be  withhekl  from  any  payment  of  income 
made  to  a  partnership,  whether  domestic  or  foreign. 

The  normal  income  tax  is  not  to  be  deducted  and  withheld  from 
any  payment  of  income  made  to  a  citizen  or  resident  of  the  United 
States  except  when  derived  from  interest  on  a  bond,  mortgage,  or 


i 


-r  I  V 


INCOME  TAX  PBIMEE. 


38 


other  obligation  issued  by  a  domestic  or  resident  corporation  which 
contains  a  contract  or  provision  by  which  the  obligor  agrees  to  pay 
any  portion  of  the  tax  miposed  by  the  Federal  income-tax  law  upon 
the  obligee  or  to  reimburse  the  obligee  for  any  portion  of  the  tax 
which  the  obligor  may  be  required  or  permitted  to  pay  thereon,  or  to 
retain  therefrom,  under  any  law  of  the  United  States.  That  is,  if 
interest  is  paid  upon  any  obligation  of  a  domestic  or  resident  corpora- 
tion, joint-stock  company,  etc.,  which  contains  a  so-called  *' tax-free" 
or  "  no-deduction  "  clause  to  a  citizen  or  resident  of  the  United  States 
normal  tax  at  the  rate  of  2  per  cent  is  to  be  withheld,  unless  personal 
exemption  is  claimed,  and  then  only  from  the  amount  paid  in  excess 
of  the  exemption  claimed. 

A  State,  county,  municipality,  or  any  other  political  subdivision 
of  a  State  is  not  required  to  withhold  any  amount  of  income  tax  from 
interest  which  it  may  pay  upon  its  own  obligations,  even  though  such 
interest  is  paid  to  nonresident  alien  individuals  or  foreign  corpora- 
tions. 

128.  Is  a  corporation  required  to  actually  deduct  and  with- 
hold the  normal  income  tax  from  the  amounts  of  interest  it 
pays  on  bonds  which  contain  a  so-called  "  tax-free  '^  or  "  no- 
deduction  **  clause;  or  may  it  pay  that  interest  in  full  and 
hold  itself  liable  for  payment  of  the  tax  from  its  own  f undsf 

The  stipulation  in  the  bonds  of  a  corporation  whereby  the  tax 
which  may  be  assessed  against  them,  or  the  income  therefrom,  \a 
guaranteed,  is  held  to  be  a  contract  wholly  between  the  corporation 
and  the  bondholder.  The  debtor  corporation  will  be  held  liable  for 
the  amount  of  tax  due,  whether  that  tax  is  actually  deducted  and  with- 
held, or  the  interest  paid  in  full  and  responsibility  for  payment  of 
the  tax  assumed  by  the  corporation. 

129.  How  may  a  citizen  or  resident  of  the  United  States 
secure  the  benefit  of  personal  exemption  to  which  he  is  en- 
titled when  receiving  a  payment  of  interest  on  bonds  con- 
taining a  so-called  *'  tax-free  "  or  "  no-deduction  "  clauseP 

By  attaching  to  the  interest  coupons  an  income-tax  exemption  cer- 
tificate, Form  1001,  revised  January,  1918.  If  exemption  is  not 
desired,  Form  1000,  revised  January,  1918,  should  bo  used. 

RELEASE  OF  TAX  HERETOFORE  BUT  NOT  NOW  REQUIRED  TO  BB 

WITHHELD. 

130.  Will  I  be  required  to  make  a  return  of,  and  be  held 
liable  for,  the  amount  of  normal  tax  which  I  deducted  and 
withheld  during  the  year  1917,  prior  to  the  passage  of  the 
war-revenue  act  of  October  3,  1917,  from  income  paid  to 
citizens  or  residents  of  the  United  States? 

No.  Section  1212  of  the  act  of  October  3,  1917»  provides  that  any 
amount  heretofore  withheld  by  any  withholding  agent,  as  required 
by  Title  I  of  the  act  of  September  8,  1916,  on  account  of  the  tax  im- 
posed upon  the  income  of  any  individual,  a  citizen  or  resident  of  thi 
United  States,  for  the  calendar  year  of  1917,  except  that  withheld 
from  interest  paid  on  bonds  containing  a  "tax-free"  or  "no  deduc- 
tion "  clause,  shall  be  released  and  paid  over  to  such  individual 


■'"'  ---T^—- ■  -  —n 


84 


INCOME   TAX   PRIMER. 


IirOOME  TAX  PBIMEB. 


35 


If 

*-■■  X 


Therefore,  any  amount  of  normal  tax  withheld  during  the  year 
1917  from  income  paid  to  a  citizen  or  resident  of  the  United  States, 
except  interest  on  oonds  and  mortgages  or  deeds  of  trust,  or  other 
similar  obligations  of  corporations,  joint-stock  companies,  etc.,  con- 
taining a  so-called  "  tax-free  "  or  "  no  deduction  "  clause,  may  now 
be  released  and  paid  over  to  sfuch  individual  and  no  return  or  pay- 
ment of  such  tax  will  be  required  from  the  withholding  agent. 

RETURN  AND  PAYMENT  OF  TAX  WITHHELD  AT  THE  SOURCE. 

131.  How  is  tax  withheld  at  the  source  to  be  returned  and 
paid? 

Tax  withheld  from  income  other  than  interest  on  corporate  obli- 

fations  shall  be  reported  to  the  collector  of  internal  revenue  for  your 
istrict  on  income  tax  Form  1042  on  or  after  February  1,  but  not 
later  than  March  1  of  the  year  next  succeeding  the  year  during  which 
the  withholding  occurred.  Tax  withheld  from  interest  on  corporate 
obligations  shall  be  reported  to  the  colhctor  on  Form  1012  within 
20  days  after  the  close  of  the  month  during  which  the  withholding 
occurred,  and  a  summary  of  such  monthly  returns  shall  be  made  to 
the  collector  on  or  after  February  1,  but  not  later  than  March  1,  on 
Form  1013. 

Payment  of  the  amount  of  tax  assessed  against  a  withholding  re- 
turn shall  be  made  to  the  collector  of  internal  revenue  in  whose  dis- 
trict the  withholding  agent  is  located. 

132.  What  should  a  withholding  return  show? 

The  name  and  address  of  the  withholding  agent,  character  of  in- 
come, and  the  name  and  address  of  the  recipient,  amount  of  income, 
exemption  claimed,  if  any,  and  the  amount  of  tax  withheld. 

RETURNS  OF  INFORMATION. 

133.  From  whom  are  returns  of  information  required? 

Section  26,  act  of  September  8,  1916,  as  amended  provides  that  every 
corporation,  joint-stock  company,  or  association  or  insurance  com- 
pany subject  to  the  Federal  income  tax  on  it^  own  income  shall,  when 
required  by  the  Commissioner  of  Internal  Revenue,  render  a  correct 
return,  duly  verified  under  oath,  of  its  payments  of  dividends 
whether  made  in  cash  or  its  equivalent  or  in  stock,  which  return  shall 
give  the  names  and  addresses  of  the  stockholders,  the  number  of 
shares  owned  by  each,  the  aggi*egato  amount  of  dividends  received 
by  each,  and  the  tax  years  and  the  applicable  amounts  in  which  such 
dividends  were  earned. 

Section  27,  san^e  act,  provides  that  every  person,  corporation,  part- 
nership, or  association  doing  business  as  a  broker  on  any  exchange 
or  board  of  trade  or  other  similar  place  of  business  shall,  when  re- 
quired by  the  Commissioner  of  Internal  R€venue,  render  a  correct 
return,  duly  verified  under  oath,  showing  the  names  and  addresses 
of  customers  for  whom  any  business  has  ueen  transacted,  with  such 
details  as  to  profits,  losses,  or  other  information  which  the  Commis- 
sioner of  Internal  Revenue  may  require  to  enable  him  to  determine 
whether  all  income  tax  due  on  profits  or  gains  of  such  customers  has 
been  paid. 


t 


I 


,»^. 

•^ 


I 


Section  28,  same  act,  provides  that  aU  persons,  corporations,  part- 
nerships, associations,  and  insurance  companies  making  a  payment 
to  any  person,  corporation,  partnership,  association,  or  insurance 
company  of  interest,  rent,  salaries,  wages,  premiums,  or  other  items 
of  fixed  and  determinable  gains,  profits,  and  income  (other  than 
dividends  on  stocks  or  gains  or  profits  derived  from  transactions  on 
any  exchange  or  board  of  trade  or  other  similar  place  of  business)  of 
$800  or  more  during  any  calendar  year  shall  render  a  true  and 
accurate  return  covering  the  payments  made,  which  return  shall 
disclose  the  names  and  addresses  of  the  recipients  of  such  payments 
and  the  aggregate  amount  paid  to  each  durmg  the  calendar  year. 

Under  this  section  returns  of  information  will  also  be  required, 
regardless  of  amounts  paid,  in  the  case  of  payments  of  interest  upon 
bonds  and  mortgages  or  deeds  of  trust  or  other  similar  obligations 
of  corporations,  joint-stock  companies,  associations,  and  insurance 
companies^  and  also  in  the  c^se  of  collections  of  items  (not  payable 
in  the  United  Stat.es)  of  interest  upon  the  bonds  of  foreign  coun- 
tries and  interest  upon  bonds  and  dividends  from  the  stock  of  foreign 
corporations,  from  all  persons,  corporations,  partnerships,  or  asso- 
ciations which  undertake  as  a  matter  of  business  or  profit  the  collec- 
tion of  foreign  payments  of  Interest  or  dividends  by  means  of  cou- 
pons, checks,  or  bills  of  exchange. 

Under  the  provisions  of  section  9  of  the  act  of  September  8,  1916, 
as  amended,  no  person,  corporation,  partnership,  or  association  can 
undertake  as  a  matter  of  business  or  tor  profit  the  collection  of  for- 
eign payments  of  interest  or  dividends  by  means  of  coupons,  checks, 
or  bills  of  exchange  without  first  obtaining  a  license  from  the  Com- 
missioner of  Internal  Revenue,  and  whoever  knowingly  undertakes 
to  collect  such  payments  as  aforesaid  without  having  obtained  a 
license  therefor  or  without  complying  with  prescribed  regulations 
shall  be  deemed  guilty  of  a  misdemeanor  and  for  each  offense  be  fined 
in  a  sum  not  exceeding  $5,000  or  imprisoned  for  a  term  not  exceeding 
one  year,  or  both,  in  the  discretion  of  the  court. 

The  returns  which  will  he  required  under  the  provisions  of  sections 
26,  27,  and  28  are  to  be  rendered  under  such  rules  and  regulations  as 
the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  may  prescribe,  which  rules  and  regula- 
tions are  now  in  course  of  preparation  and  will  soon  be  announced. 

134.  I  pay  an  annual  rent,  exceeding  $800  in  amount,  to 
an  agent  who  refuses  to  disclose  the  name  of  the  landlord. 
May  I  require  the  agent  to  furnish  me  with  the  name  and 
address  of  his  principal  in  order  that  I  may  make  a  proper 
return  of  information? 

Yes.  When  an  agent  receives,  in  behalf  of  his  principal,  a  payment  > 
falling  within  the  provisions  of  law  for  information  at  the  source, 
he  is  required  by  law  to  furnish  the  name  and  address  of  the  prin- 
cipal upon  receipt  of  a  demand  therefor  from  the  payer,  and  in  de- 
fault of  a  compliance  with  such  a  demand  the  agent  becomes  liable  to 
a  penalty  of  not  less  than  $20  nor  more  than  $1,000. 

135.  Where  a  person  receives  a  cash  compensation  for  serv- 
ices rendered,  and  in  addition  thereto  commissions,  living 
expenses,  or  other  allowances,  is  the  aggregate  amount  of 


> 


86 


INCOME  TAX   PRIMEB, 


li 


cash  plus  the  value  to  such  person  of  the  allowances  to  be 
returned? 

Yes.  A  return  under  section  28  is  required  in  each  case  where  the 
cash  compensiition  plus  the  vahie  of  the  allowances  equals  or  exceeds 
$800  for  the  tax  year. 

PAYMENT,  ABATE»IENT,  AND  REFUND  OF  TAX  ASSESSED. 

136.  To  whom  is  an  assessment  of  income  tax  to  be  paid? 
To  the  collector  of  internal  revenue  with  whom  your  return  was 

filed  and  from  whom  a  receipt  will  be  received. 

137.  When  does  payment  of  income  tax  assessed  against 
an  individual  become  due  and  payable? 

The  tax  is  to  be  paid  upon  receipt  of  a  notice  from  the  collector 
of  internal  revenue  of  the  amount  of  tax  due,  and  at  all  events  not 
later  than  June  15.  If  the  tax  is  not  paid  by  June  15,  the  collector 
will  issue  a  second  notice  and  demand  therefor,  and  if  at  the  expira- 
tion of  10  days  from  date  of  this  notice  the  tax  remains  unpaid  it 
becomes  delinquent.  The  penalty  for  such  delinquency  is  5  per  cent 
of  the  amount  of  tax  unpaid  and  interest  at  the  rate  of  1  per  cent  per 
month  upon  such  tax  from  the  time  the  same  became  due  to  date  of 
payment. 

138.  What  recourse  has  a  taxpayer  when  he  feels  that  ho 
has  been  assessed  with  income  tax  in  excess  of  his  true  tax 
liability? 

He  may  exercise  his  right  to  file  with  the  collector  of  internal 
revenue  for  his  district  a  claim  for  abatement,  executed  on  Form  47. 
copies  of  which  may  be  obtained  from  the  collector.  The  filing  oi 
such  a  claim  prior  to  the  due  date  of  the  tax  acts  as  a  stay  to  the 
collection  of  the  5  per  cent  penalty  for  delinquency  in  payment,  pro- 
vided, in  case  of  rejection  of  the  claim,  the  tax  due  is  paid  within  10 
days  from  the  date  of  notice  of  such  rejection.  However,  in  case 
of  rejection,  interest  at  the  rate  of  1  per  cent  per  month  will  run 
fi'om  the  date  of  the  notice  served  prior  to  the  fihng  of  the  claim  and 
until  the  tax  due  is  paid. 

It  should  be  understf5od,  however,  that  the  filing  of  a  claim  for 
abatement  of  tax  alleged  to  have  bex»n  erroneously  assessed  does  not 
operate  as  a  suspension  of  the  collection  of  the  tax.  If  the  collector 
feels  that  the  suspension  of  collection  will  jeopard ize  the  interests  of 
the  Government,  ho  may  collect  the  tax  and  leave  the  taxpayer  to  his 
remedy  by  a  claim  for  refund. 

139.  On  my  1916  return  I  was  assessed  with  income  tax  in 
excess  of  my  true  tax  liability  and  same  was  paid.  How  may 
I  secure  a  refund? 

By  filing  with  the  collector  of  internal  revenue  for  your  district  a 
claim  for  refund,  executed  on  Form  46,  copies  of  which  may  be  ob- 
tained from  the  collector. 

140.  In  1317  I  paid  $50  income  tax  in  excess  of  my  true 
tax  liability  for  the  year  1916.  Can  this  excess  payment  be 
applied  in  payment  of  a  later  assessment  of  tax? 


INCOME  TAX  PBIMEB. 


87 


4 
s 


\ 


* 


No.    An  excess  payment  of  tax  in  one  year  can  not  be  offset  against 
an  assessment  of  tax  for  a  subsequent  year. 

141.  Can  an  assessment  of  income  tax  be  paid  in  install- 
ments? 

Section  1009,  act  of  October  3, 1917,  provides  that  taxpayers  liable 
for  income  tax  may  make  payments  of  such  tax  in  advance,  in  in- 
stalhnents,  or  m  whole,  of  an  amount  not  in  excess  of  the  estimated 
tax  which  will  be  duo  from  them,  and  upon  determination  of  the  tax 
actually  due,  any  amount  paid  in  excess  shall  be  refunded  as  taxes 
erroneously  collected,  and  credit  against  such  tax  so  paid  in  advance 
may  be  allowed  in  an.  amount  not  to  exceed  3  per  cent  per  annum, 
collected  upon  the  amount  so  paid  from  the  date  of  such  payment  to 
the  date  now  fixed  by  law  for  such  payment;  but  no  such  credit  shall 
be  allowed  on  payments  in  excess  of  taxes  determined  to  be  due,  nor 
on  payments  made  after  four  and  one-half  months  after  the  close  of 
the  taxable  year.  In  case  of  an  undertaking  to  pay  tax  in  install- 
ments, and  default  of  any  installment,  the  penalty  for  failure  to  pay 
tax  when  due  will  attach. 

Rules  for  the  calculation  of  the  3  per  cent  credit  on  account  of  ad- 
vance payment  of  tax,  or  a  reduction  otherwise  of  the  amount  of  tax 
assessable  on  a  return  of  income  by  means  of  advance  payments,  are 
fully  set  forth  in  Treasury  Decision  2622. 

INSPECTION  OF  RETURNS. 

142.  Will  any  information  contained  in  my  personal  re- 
turn be  disclosed  to  another? 

No.  The  law  specifically  provides  that  any  information  relative 
to  an  individual  s  income  and  deductions,  obtained  from  his  personal 
return,  or  otherwise,  in  connection  with  the  income  tax,  shall  be  in- 
violably confidential,  and  it  is  unlawful  for  any  employee  of  the 
United  States  to  divulge  or  make  known  such  information  in  any 
manner  whatsoever  to  any  person,  except  the  proper  officers  and  em- 
ployees of  the  Treasury  Department,  or  to  the  proper  officers  of  % 
court  for  use  m  a  trial  of  any  case  to  which  both  the  United  States 
and  the  person  rendering  the  return  are  parties;  and  any  offense 
against  this  provision  of  law  will  be  held  to  be  a  misdemeanor  and 
be  punishable  by  a  fine  not  exceeding  $1,000,  or  imprisonment  not 
exceeding  one  year,  or  both,  at  the  discretion  of  the  court,  and  dis- 
missal from  the  service  of  the  Government. 

143.  If  my  attorney  requests  a  copy  of  my  return  or  any 
information  relative  thereto,  will  his  request  be  granted? 

No;  unless  the  return  was  rendered  by  him  for  and  in  your  behalf, 
or  ho  submits  an  authorization,  personally  signed  by  you,  permitting 
the  copy  or  information  to  be  given  to  him. 


\ 


tNDEX. 


- 


• 


Abatement  of  assessment,  claim  for 

Accident   Insurance IZL.J1!! 

Accrual  basis,  returns  may  be  made  on 

Farmers ~r~" 

Actors  and  actresses,  costumes  of. 


Additional  tax 

Dividends  are  subject  to IIIIZ! 

Husband  and  wife r__~"~^_~2[ 

Rates IIIZ^^ 

Administration,  expenses  of Z. 

Administrators 

Ancillary 


Qoestiom. 

—  138 

—  41 

—  75 
28 

—  103 

14 


Expenses  deductible 


Advance  payment  of  tax 

Agents  for  nonresident  aliens. 

Airents  may  make  returns  for  principals. 


AgenU  real  estate;  in  connection  with  information  at  the  TOu'rceand  rent 
payment _^ _^ 

Agents  versus  fiduciaries I_IIII Z, 

Agents  working  on  commission  basis,  expenses "  [||^ 

Alimony ~ 

Appreciation  involving  value  of  capftai  assets  rrtoci'divWrads^resuitine 
from  capitalization  of 

Appr<-ciatlon  in  value  of  tecurities  evidencS  bybookentri^only    II 

Assessment  of  tax 

Assessment  on  stock ..«««. ~ 


20  (h) 

9 

14 

124 

112,114,121 

117 

124 

141 

U 

6 

134 

110 

64 

48 

55 

80 
137 


—  70, 71 


Bad  debts  .. 


Compromises 
Recoveries 


90-98 
98 
95 
44 
118 
137 


Banlc :  Taxes  paid  on  stock  for  shareholders IIIII I_»III~~ 

Beneficiaries :  Inspections  of  returns  made  by  fiduciaries"    "        I I" 

Bills  for  taxes ~~~ 

Bonuses IIIIIIIIIIIIII      II~II~II~II"  33 

O-immon  stock  as  bonus  when  purchasing  preferred  stock ~     -    -    - 

Books  and  bookkeeping ~  75 

Appreciation  in  values  evidenced  by  books  only IIIIIIIII""  80 

Depreciation  In  values  evidenced  by  books  only I  gn 

Farmers _  oq 

Bonds:  "^ 

Interest :  Deduction  of  the  tax  at  the  source 127-128 

liiieiesi:  Keturas  of  information  by  the  debtor IIIIII""  133 

Liberty  loan  bonds ^  38  7A 

Losses  In  connection  with  purchase  of IIIIII_II  '  80 

State  bonds :  No  withholding  of  tax  on  interestlllllllllllllllH  127 

Tax-free  covenant  bonds,  tax  to  be  deducted  on  interest  on~III~127~128  129 

Building  and  loan  associations :  Amounts  placed  to  credit  of  shareholders  '    46 

Buildings,  depreciation  of _          "  99 

Condemned   IIIIIIIIII              I_  ini 

Outlived   usefulness IIIIIIIIIIIIIIII"!       "I  lOQ 

Brokers,  returns  of  information  by IIIIIIIIIIIIII          I  133 

••Business  expenses"  defined IIIIIIIIIIIIIII IIII  59 

SS 


I 
i 


rl 


I 


40 


INCOME  TAX  PKlMEiU 


O. 


Question. 
55 


7T 

129 

15 


135 
40 
45 
65 


Capital  assets,  capitalization  of  appreciation  of 

Capital  invested,  estimated  interest  on 

Certiticates  of  ownership 

Cmidren : 

Additional  exemption  on  account  of 

Employed  by   parent 61 

Wages  of,  liability  of  parent  in  connection  with 37 

Claim  for  abatement  of  assessnieut 138 

Claim  for  refund  of  excess  taxes  paid 139 

Commissions : 

In  addition  to  salary ;  In  connection  with  Information  at  the  source— 

On  renewal  premiums 

Common  stoclj  as  bonus  to  preferred  stoclt 

Commuters ;  railroad  fares,  lunches,  etc 

Comprorai.ses  of  indebtedness 98 

Cod  tracts: 

Installment  sales 36 

With  State  or  political  subdivision  thereof 34 

Coupons;  certiticates  of  ownership  to  accompany 129 

Coui:K>ns  purchased  ;  accrued  Interest 42 

Crops,  lasses  in  connection  with 89 

D. 

Damag:es  paid  for  Injuries  inflicted 81 

Damages  received  for  injuries  sustained 41 

r»ebtors,  deduction  of  taxes  at  the  source  by 127 

Debtors,  returns  of  information  by 133 

Debts  deductil»te  or  not ^^oq 

Compromises 98 

Recoveries 9o 

Decedent  dying  during  tax  year 1*- 

Deduction  of  tax  at  tlie  source ^-^ 

Exemption  claims 1^9 

Fiduciaries  for  nonresident  aliens Ho 

Foreign    corporations Ij^^ 

N<»nrcsident  nliens ^  •['»  j^^ 

Parttiersliips   1^^*^'  ^27 

Payment  of  tax  withheld 1^1 

Release  of  taxes  withheld  during  1917 1^2 


Returns 


130. 132 


Tax-free  covenant  bonds,  interest  on 127,128,129 


Deductions 
P»ad  debts 


58 
90 


Gifti5___ 
Interest. 

Losses 

Taxes. 


Depletion 1^ 

Deprocintion 99 

Expenses ^9 

Fiduciaries « l-"*  1-*^ 

94, 105 

_    ~_     _                    7G 

■_ 80 

'"'""'"_ 78 

Deed  of  trust  must  be  absolute  and  irrevocable 110 

Delay  in  payment  of  tax 1 137 

Depletion  of  mines  and  wells 104 

Depreciation 99 

Buildings    condemned 191 

Buildings,  outlived  usefulness 100 

Costumes  of  actors  ond  actresses 103 

Patents    192 

Rates    99 

Securities,  depreciation  evidenced  by  booijs  only 80 

Trust    estates 125 


I 


IKCSUB  TAX  PSIICBB. 


41 


Qnestloik 

Dteeonnt  on  account  of  advance  payment  of  taxes 141 

Dividends  ,     ,   M.  50, 6S 

Declared  prior  to  Aagnst  ^  1917,  from  funds  specified  to  hare  been 

acciuDuhited  prior  Co  March  I.  1913 58 

DeductloD  of  the  tax  at  the  sour^se;  nonresident  alien  corporations 127 

Sixempx  for  normal  tax  purposes 20(h) 

Life  Insurance;  paid-up  policies 57 

Returns  of  information  relative  to  dividend  payments  made 138 

Sale  of  stock ;  loss  resulting  from  not  to  be  offset  by  dividends  earned        84 

Stock  dividends ; 52, 56 

Stockholder's  duty  to  ascertain  year  in  which  properly  taxable 54 

Donations  deductable  or  not 94, 105, 106 

E. 

Entertainment  expenses fjg 

Estates: 

Expenses  of  administration 124 

In  process  of  administration 114 

Insurance  accruing  to 12J 

Trust  estates lis,  li4,~i20, 123, 125 

Excess  payments  of  taxes 139, 140 

Executors 112, 114, 121 

Expenses  deductable 124 

Exempt  Incomes __^        xi 

Exemption iB 

Decedent  dying  during  tax  year jjj 

Deduction  of  tax  at  the  source:  Claims  for  exemption 129 

EiStatc  s  during  gettiement 112, 114 

Guardians,  etc,  for  wards,  etc I I m 

Head  of  family 21        17 

Husband  or  wife  dying  during  tax  year I i<§ 

Returns  may  be  required  even  though  income  may  exceed  exemption        10 
Trust  estates us^  114^  12O 

Expenses  deductable  or  not 59 

Business  v,  personal  expenses _-._«.        M 


Failure  to  fUe  returns 

False  returns 

Farms  and  farmers : 

Books  and  bookkeeping. 

Crop  losses 


i 
T 


Expenses  deductable 89  66,  86 

Fancy   stock   farm "~ '      '  g^ 

Hired   help Z ZI"I_I        00 

Income  subject  to  return  and  tax I 28,29,30.31 

Live  stock  losses '     'gg 

Recreation  or  pleasure;  farm  operated  for_ ZI_II        80 


Fees  paid  to  attorneys^  arcliitects,  etc 

Fees;  uncollectible 

Fiduciaries 

Derturtion  of  the  tax  at  the  source  by 


7S,  74 


UO 

110 

Deductions   allowable   to i24, 120 

Income  received  from ZII II 20(4) 

Information  at  the  source I_IIIIIIIIIIIIII       110 

Nonresident  alien  beneficiaries IIII_III"ll6  120 

Returns _  IIIII~        '  lil 

Tax    liability I__I IIII.IIIIII I"      ilj 

Fires ;  timberhinds HI IIIIIII.IIIH        87 

Foreclosure  proceedings IIII_I I 97 

Foreign  items;  returns  of  information  relative  to___II__IIIIIIIII_IIII      138 
Foreign   organizations   liaving   no   office   or   place   of   business    in    the 
United  States ^^ 


42 


IKOOME  TAX  PBIMEB. 


nroOMB  TAX  PBIMEB. 


48 


G. 


Gas  wells;  depletion  of. 
Gifts  deductatne  or  not.. 


QaestloA. 
_-      1( 


Good  will ;  stock  dividends  resnltinf  from  a  capitalization  of 

Gross  income-. 
Guardians;  returns  by. 


0il06,l( 


Head  of  family 

Hired  help: 

Cbildren  paid  by  parent 


Farmers    — . 

Husband  and  wife: 

Additional  tax  liability 

Deatb  of  one  during  tax  year 

Keturns  by 


61 
60 

9 

16 

8 


ImproTements  made  nnder  terms  of  lease 

Income 


82 

18 

Amount  needed  to  make  return  necessary 1 

Exempt  Inctime 18 

Flduciarlea;  income  received  from _.« 20(d) 

Gross  Income 20 

Information  at  the  source 135 

Net    income 19 

Partnerships 107 

Income  received  from . — — . 20(c) 

Sale  of  Interest  in 108 

Income  tax  paid  for  previous  tax  year  Is  not  duductible 79 

Incompetents:  Conservator  of  estate  to  make  return 111 

Information  at  the  source 133 

Fiduciaries 115 

Inspection  of  returns 142, 143 

By  beneficiaries  of  returns  made  by  fiduciaries 118 


Inf(tallment    sales 

Installments;  payment  of  tax  in 

Insurance : 

Accident    


36 

141 


41 
57 
39 


Dividends  on  paid-up  life 

Endowment  policies  matured 

Life ;  on  employee  or  member  of  partnership  for  benefit  of  employer 

or  firm 68 

Life  and  fire ;  on  self  and  home 67 

Payable  to  estate 122 

Interest  accrued  on  coupons  purchased 42 

Interest  deductible  or  not 76 

Interest  on  liberty  loan  bonds 38 

Interest  payments ;  returns  of  information  by  debtor 133 

Inventories 35 

Investments;  losses  in  connection  with 80 

Dividends  received;  bearing  on  losses 84 


Judgments  paid. 


81 


Liberty  loan  bonds : 

Interest  from  as  taxable  income —  38 

Interest  on  money  borrowed  with  which  to  buy  bonds 76 

License  for  collecting  foreign  items 133 

Live  stock;  losses  in  connection  with 88 

Local  improvements ;  taxes  for —  <o 


*    I   } 


f 


Losses  dednctibla  or  not 


Losses  from  sale  of  property 

losses  "in  business "  v.  ** Losses  outside  of  business ** 

March  L  1913 ;  manner  of  determining  value  of  property  as  of 

Merchants : 

Y        Expenses  deductible - .  

Profit  or  loss ;  manner  of  determining 

Mines;  depletion  of : 


QuestlML 

_  80 
^  82 
—        83 


27 

59 
35 

104 


N. 


Net  Income _«_- 

Nonresident  aliens: 

Agents  acting  for , 

Deduction  of  tax  at  the  source 

Fiduciaries  of 

.Normal  tax  rates 

Dividends  are  exempt  for  normal  tax 

Notice  and  demand  for  tax 


19 

11 

127 

116, 126 

14 

20 {h) 

137 


O. 


on  wells;  depletion  of. 


Orchards ;  initial  expenses  In  cozmection  with. 

Ownersllip  norriflrMitoa 


104 

86 

129 


P. 

Partnerships — __>_^-.«-»__ 1(JT 

Deduction  of  tax  at  source  against 109, 127 

Income  received  from __?0(f) 

Life  Insurance  on  member  for  benefit  of  firm . 68 

Sale  of  Interest  in ,                           108 

Patenta  depreciation  of 102 

Penalties : 

Delay  In  pajrment  of  tax _— »_ .—_.-,  187 

Dividing  contents  of  returns „,-,_  142 

Failure  to  make  returns 4 

XZ      Failure  to  obtain  license  for  coll  fiction  of  foreign  it^ma  igg 

C       Failure  to  supply  information  at  the  source 134 

False  return  -,.,^„,—., - .  ■ -«-,^ 7 

Pensions 43 

Pw  diem  allowances  in  addition  to  salary 24 

personal  expenses . S9 

Profit  from  sale  of  prox>erty -«« — .. ,          26 

Installment  contracts 36 

Professional  men: 

Expenses    deductible 59,72 

Fees  paid  to — _. 73,  74 

Fees  uncollectible 96 

R 

pecoverles  on  bad  debts 95 

Itefund  of  excise  taxes  paid ;  claims  for 139 

Release  of  tax  withheld  at  the  source  in  1917 131 

Bent  payments;  information  in  regard  to  by  payor 133 

Agent  to  give  name  and  address  of  principal 134 

Retired  pay  of  Army  and  Navy  officers 43 

Returns . 1 

Accrual  basis ;  returns  may  be  made  on 75 

Farmers    28 

Administrators   112, 114, 121 

Agent  may  make  return  for  principal 6 


44 


INCOME  TAX  PRIMER. 


Beturas-Continueil.  Question. 

By  whom  filed ^ 

Conservator  of  estate  of  incompetent 111 

Deduction  of  tax  at  tlie  source ;  return  of  amounts  withheld 130, 132 

Exemption  may  exceed  income  yet  return  may  be  required 10 

Extension  of  time  for  flHng 5 

Failure  to  file  return 4 

False  return '* 

Fiduciaries 111 

Form  for  making 13 

Guardians HI 

Husband  and  wife 8 

Information  at  the  source 133 

Fiduciaries 115 

Partnerships 1^^ 

Penalty  for  failure  to  file 4 

Penalty  for  false  return 7 

Period  covered  is  calendar  year  for  Individuals 12 

Secrecy  of 142, 143 

Trustees iid,  izu 

When   filed 3 

Where  filed 2 

Rights  to  subscribe  to  additional  stock 47 

Boom  and  board  in  addition  to  salary 23 

S. 

Salary  received 21,  22,  23,  24 

Bonuses ^ 

Paid  in  kind 49 

Paid  self  by  taxpayer ^- 

Returns  of  information  by  payor 1^.  i^^ 

Bale  of  property : 

Installment   contracts ^ 

Loss  incurred °- 

Profit  from ^^ 

Salesmen  working  on  commission  basis;  expenses  of 04 

Secrecy  of  returns ^42, 14o 

State  or  political  subdivision  thereof: 

Bonds ;  no  withholding  of  tax  on  interest  on 1^< 

Contracts  with 34 

Stock :  70  71 

Assessment   against '"»  *^ 

Dividends  on 20 ( h) 

Common,  as  bonus  on  purchase  of  preferred 45 

Losses  in  connection  with  purchase  of |^ 

Dividends  received ;  bearing  on  losses 84 

Rights  to  subscribe  to  additional 47 

Taxes  paid  by  bank  for  shareholders 44 

Stock  dividends \oo 

Stockholders,  returns  of  information  relative  to loo 

T. 

Tax 1^^ 

Abatement  of  assessment,  claim  for 138 

Advance  payment  of ™ 

Rills  l0< 

Excess  payments ^^^'  |3X 

Penalty  for  delinquency ^^^ 

Refund  of  excess  amounts  paid,  claims  for io» 

To  whom  paid |gl^ 

When  due 

Tax-free  covenant  bonds,  etc. ;  tax  to  be  withheld  on  interest 127, 128 

Tax  liability ^.J 

Fiduciaries ™ 

Tax  rates ^^ 

Tax  year  for  individuals ^^ 


INCOME  TAX  PRIMES. 


Taxes  deductible  or  not „ 

Taxes  paid  by  bank  on  Its  stock  for  shareholders ^ 

Taxes  paid  by  tenants  under  lease  contract 

Tenants  — .»- 

Tlmberlands;  losses  from  fires 

Title,  defective;  expenses  in  connection  with — — . 

Trust  estates —»—._«—— 


Depreciation  allowable « 

More  than  one  trust — _— « 

Trustees  to  make  returns — ,,    .-_ 

More  than  one  trust 


4« 

Question. 

78 

44 

69 

82, 69 

87 

73 

113, 120 

125 

123 

113, 120 

123 


*        \ 


United  States  bonds ;  taxability  of  interest  on  the  Ub»t7  loaa  bonds 

W. 

Wells :  Depletion  of  oil  and  gas  wells 

WitlUioicling  of  tax  at  the  SQiirce  (see  "  Dedncdaa  9t  tax  at  tke  soorce.") 


38 


ICM 


It.t 


i^i 


rr 


6AYLAM0UNT 
PAMPHLET  BINDEII 

AAonuf  octursd  by 
lOAYLORD  BROS.  Inc. 
SyrocuM,  N.Y. 
Stockton,  Colif. 


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